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Top 6 Stocks for May
By: Sam Collins
Be Ready to Buy on Pullbacks
In an Easter holiday-shortened week, the key indices broke their downtrends - drawn from the highs of February and April - and drove into major resistance. But the light volume and lack of solid breadth don't necessarily support an immediate breakout followed by a major move to significantly higher prices.
The run-up from the lows of March have taken a lot of energy from the market, and so any breakout will likely be restrained by zones of potential sellers who bought stock at higher prices and can't wait to get out. And the boost that stocks got from a falling U.S. dollar may fade in light of the strong probability that the greenback will rebound from its currently oversold status.
However, my overall annual targets (established in December 2010) for the Dow Jones Industrial Average, S&P 500 and Nasdaq remain at 12,800, 1,400 and 3,700, respectively. The bull market is intact, but a consolidation is probably due shortly before buyers push the major indices to these levels.
This means you may have the chance to get the stock picks on our
list for an even better price. Here are our top stocks to buy for
Arrow Electronics Inc. (NYSE: ARW ) is one of the world's largest distributors of electronic and computer products to industrial and commercial customers. An emphasis on its global components business through a recent acquisition should boost revenues and profit margins this year and next. Selling at just nine times earnings, the stock is cheap compared to its peers. S&P rates ARW a "four-star buy," and Zacks has set a target of $51.
Technically, the stock has hugged its 50-day moving average and support line since hitting bottom last summer. Recently, it pulled back to those important support lines and reversed up on what could evolve into a breakaway gap, which occurs when a stock jumps on high volume leaving a hole or gap in the chart. This is a very favorable development, especially when combined with a stochastic buy signal. The stochastic buy signal occurs when the red (fast) line crosses up through the slow (blue) line.
Our technical trading target for ARW is $50 based on the high probability of a breakout at $44. Buy ARW below $42.50.
Top Stock #2 - Advanced Micro Devices (AMD)
Global semiconductor company Advanced Micro Devices Inc. (NYSE: AMD ) offers x86 microprocessors for a wide range of commercial and consumer markets. The stock was recently upgraded by several research firms, and the company just reported that Q1 profits nearly doubled with a modest gain in sales.
AMD became a bottom fisher's stock following the deep "V" low made last summer. The stock has held above its 200-day moving average since flashing a golden cross - a powerful buy signal generated when the 50-day moving average crosses up through the 200-day moving average.
If the stock is able to push through the high above $9.50, its 12-month target would adjust to $13.50. Buy AMD below $8.50.
Top Stock #3 - Chevron Corp. (CVX)
Globally integrated energy giant Chevron Corp. (NYSE: CVX ) engages in most forms of energy exploration and development. Higher oil prices, production efficiencies and reduced refining activities have allowed CVX to concentrate more of its efforts in Asia, which should result in higher margins and growth potential. S&P rates the stock a "five-star strong buy" with a target of $127 in 12 months.
Technically, CVX has hugged its 50-day moving average since August 2010, and reversed from it in April, triggering a stochastic buy signal. The stock then gapped through its 20-day moving average and looks like it might successfully attack the high at close to $110. A close above that high would yield a near-term trading target of $120. Buy CVX at $106.50.
Top Stock #4 - DuPont (DD)
Chemical giant DuPont (NYSE: DD ) offers a variety of products and services for many global markets including agriculture, food, electronics, building and construction.
On April 21, DD reported Q1 earnings of $1.52 versus analysts' expectations of $1.37, and it raised its full-year forecast. Ford Equity Research maintains a "strong buy" on the stock.
A break though the triple-top at $56.50 should result in a quick move to $60 and an acceleration to as high as $75 by year end. Buy below $55 or a breakout from its high at $56.50.
Top Stock #5 - Marathon Oil Corp. (MRO)
Integrated international energy company Marathon Oil Corp. (NYSE: MRO ) is engaged in exploration and production, and oil-sands mining. It also explores for, produces and markets liquid hydrocarbons and natural gas. Credit Suisse recently raised its target on MRO to $57 due to a re-evaluation of its "cheap inland crudes."
Technically, note the heavy accumulation of the stock and a recent buy from the stochastic indicator. The fact that MRO's recent pullback held at its 50-day moving average, and then reversed and gapped through its 20-day moving average, means that the chance of a successful drive through a triple-top at $54 is very high.
Buy MRO below $51 or on the breakout from $54 with a trading target of $60.
Top Stock #6 - NetApp Inc. (NTAP)
NetApp Inc. (NASDAQ: NTAP ) provides enterprise storage and data management software. The company has an impressive record of earnings growth, robust revenue growth and expanding profit margins. In the past fiscal year, NTAP improved its earnings per share by 40%, which is just the last in a string of solid earnings over the past two years. Analysts' price targets average over $60.
Technically, NTAP ran into selling in February that ended with two selling climaxes and opened two gaps. A trading gap is a change in price levels between the close and the open of two consecutive days. As long as a stock does not change its major trend, gaps are usually closed by reversals in price that move into and above the open pocket on the chart.
The recent rally closed the first of two open gaps on NTAP's chart. The gap at $55.10 to $58.19 has not closed, and this open gap is a trading target. There is also a Moving Average Convergence/Divergence (MACD) buy signal because the red (fast) line is above the blue (slow) line. Longer term look for NTAP to break its high with a 12-month target in the mid-$60s. Buy NTAP below $52.