I have three chart services at my fingertips -- but for me,
reviewing charts is a visual thing. After 26 years of deciphering
stock charts, recognizing the patterns has become second
Every weekend, I screen all the growth stocks that I follow to
see which charts are on the verge of breaking out. I then take
the stocks with good-looking charts and review their
fundamentals. I'm looking for stocks with projected earnings
growth (plus dividends) of 15% or more for each of the next three
My goal is to identify the stocks that have the best chance of
going up immediately. The charts tell me which stocks are going
up, and the earnings growth verifies that the stocks have a good
reason to go up. Now I've got my buy list for the week.
I then review the larger list of stocks that made the first
cut-off -- the ones with the bullish charts -- and group them
into industries to see which trends materialize. Whichever
industry is leading, I do more research among the major stocks in
that industry to find a few more good investment ideas.
Earlier this year, oilfield services companies --
Baker Hughes (NYSE:
rose to the top of that list
. The stocks rose in unison, then formed tight trading ranges for
five weeks. They now appear ready for additional capital gains,
led by Schlumberger's breakout last week. As the saying goes, the
trend is your friend.
More recently, the stocks that are consistently ending up in
my buy list include anything transportation-related (with the
exception of automakers): airplanes, freight (trucking),
railroads, rental cars and trucks, and even motorcycles.
Three of these bullish growth stocks are just beginning to
break out above their recent trading patterns. It's time to catch
a ride with transportation stocks.
Kansas City Southern (NYSE:
Kansas City Southern (which my colleague
Marshall Hargrave profiled in February
) owns railroad investments and 6,600 miles of track,
ranging from the central U.S. through Mexico and into
Fresh off strong results in its most recent quarter,
KSU's management foresees earnings growth eventually
reaching 20% per year. Analysts agree and expect the
company to sustain double-digit earnings growth of 15 to
17% a year for the next three years.
KSU's longer-term profit drivers include continued
industry growth in Mexico, including two new car-assembly
plants; expansion of Mexican rail traffic into the U.S.;
and continued deleveraging. With a current long-term
debt-to-capitalization ratio of 31.5%, KSU is aiming for
lower debt levels than its peers.
Shares of KSU (which pays a 1% dividend yield) rose
steadily for several years, peaked in November, then
corrected with the broader stock market early this year.
After stabilizing between March and May, the stock broke
past upside resistance at $106 last week. I expect KSU to
climb to $114, meet minor resistance, and then keep
rising to the November highs around $126 -- a 17% gain
over today's share price. At that point, I expect the
stock to consolidate for a while before making its next
American Airlines Group (NYSE:
American Airlines Group emerged from bankruptcy
protection last year, merged with US Airways Group in
December, and issued new stock.
Trends in business and leisure air travel have been
improving with the growing U.S. economy, allowing for
increased revenue and net income. In addition, cost
efficiencies associated with the US Airways merger are
also contributing to profitability.
The Street expects American's EPS to grow 77% this
year, to $5.15 per share, followed by additional
double-digit growth in 2015 and '16. That's a huge leap
What's more, the resulting forward price-to-earnings
(P/E) ratio is shockingly low at 7.7. Compare that with
Southwest Airlines (NYSE:
at 17.6 and
Delta Air Lines (NYSE:
If American's 2014 P/E rises to the low end of its
peers' range at 13, that would give AAL a price of $67,
representing 68% upside over today's price.
The company has higher cash levels than its peers.
Analysts see a dividend increase and a large share
repurchase authorization as being likely later this year.
And while airlines typically have higher debt levels than
other industries, clearly American Airlines is
comfortable enough with its debt levels to deploy cash
AAL fluctuated steadily between $33 and $39 for the past
four months, but that range has narrowed recently to
$37.50 to $39.50. A narrowing of a trading range is a
very bullish sign for a pending breakout -- and sure
enough, AAL has begun closing at new highs in recent
Hertz Global Holdings (NYSE:
Hertz Global Holdings is the owner of airport car
rental brands Hertz, Dollar, Thrifty and Firefly. (My
colleague Marshall Hargrave
also profiled Hertz in February
Hertz plans to spin off its construction
equipment-leasing division in a tax-free distribution to
shareholders around early 2015. Hertz expects to garner
around $2.5 billion from the spin-off, which it will use
to pay down debt and repurchase about $1 billion of
Increases in business and leisure travel are
contributing to Hertz' strong financial outlook.
Profitability is also increasing from cost synergies
associated with last year's acquisition of Dollar Thrifty
As Morgan Stanley's analysts summarized, "Hertz is a
great brand, rentals are a consolidated industry, and
[Chairman and CEO] Mark Frissora is known for being a
good steward of capital."
Consensus earnings estimates show very nice EPS growth
of 14% this year and 26% next year for Hertz, which
currently sports a forward P/E of 15.7.
Earlier this year, analysts feared that increases in
used-car supplies and new-car price wars would be
detrimental to Hertz's ability to resell its cars at good
prices. Those fears have not played out, and as a result,
stock charts of rental car companies are turning
After almost doubling in price in early 2013, HTZ has
been trading roughly sideways (while edging upward) for a
year. In May, the trading range narrowed to $27.70 to
$29.70, a bullish indication that the stock price is
about to launch toward new highs again.
Risks to Consider:
KSU's risks include currency fluctuations, and Mexico's
legislature is considering measures to open up rail traffic to
increased competition. Like other airlines, American's
profitability is affected by fluctuations in fuel prices, labor
costs, and economic growth. Wall Street makes frequent
adjustments to Hertz's earnings estimates, causing volatility in
the stock price. A slowing economy would adversely affect the
profitability of all three.
Action to Take -->
KSU has begun its upward move, but AAL's breakout has only
tentatively begun. No one has missed their opportunity to catch
the next upswing in American Airlines stock. I expect Hertz's
next price run-up is imminent. My recommendation on all three is
to buy now.
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