The Saudi Arabian Crown Prince Mohammed bin Salman announced plans to build a new city called ‘NEOM’, with an investment of about half a trillion dollars. This is one of the many steps being taken by the Prince to reduce the Kingdom’s dependency on oil. Let’s know more about this project and see if we can benefit from this.
- Saudi Arabia announced building a futuristic city, called NEOM
- This is part of the Vision 2030 plan of the Crown Prince
- If successful, this project can wean away Saudi Arabia’s oil dependence
- We can trade this turnaround in Saudi Arabia through an ETF
What does the name NEOM stand for?
Though NEOM sounds like a name taken from the latest sci-fi movie, in reality, it is formed by a mix of Latin and Arabian languages.
According to Al Arabiya, the first three letters of the name, ‘NEO’ means ‘new’ in Latin and the letter ‘M’ is an abbreviation for ‘Mostaqbal’, which means ‘future’ in Arabic.
Where will it be located and how big is it going to be?
NEOM will connect to Egypt on one side and Jordan on the other, making it the first private zone that is expected to span in three countries.
The mega city will be built over an area of 10,230 square miles, making it 33 times bigger than New York City.
What does the city plan to achieve?
“This place is not for conventional people or conventional companies,” Prince Mohammed told an audience of investors gathered in Riyadh. “This will be a place for the dreamers of the world,” reported The Washington Post.
It will entirely be powered by renewable energy, have driverless cars, be drone friendly, with a lot of robotics being used for various activities.
“Robots,” said Marc Raibert, the CEO of Boston Dynamics, to the conference crowd, “could perform a variety of functions, covering areas such as security, logistics, home deliveries and even looking after the elderly and infirm,” in NEOM, reported The Washington Times.
Through this project, the Crown Prince aims to provide direction to the younger generation of Saudi Arabia and keep them away from the restlessness building in the region.
“Seventy per cent of the Saudis are younger than 30. Honestly, we won’t waste 30 years of our life combating extremist thoughts. We will destroy them now and immediately,” said Prince Mohammed, reports news.com.au.
Currently, the public sector is the major employer of the Saudi’s, which eats up about 50% of the nation’s total expenditure. However, the Vision 2030 plan aims to shrink it to only 20% and this will need a large private partnership. NEON is a step in that direction.
The new city is being modeled on the lines of Dubai, a duty-free zone. If all goes according to the plan, the mega city is expected to earn a GDP of $100 billion by 2030. In 2016, the oil-rich nation had a GDP of $646.4 billion.
Therefore, NEON, if successful, will be a major source of revenue for Saudi Arabia. The project will be spearheaded by former Alcoa boss Klaus Kleinfeld.
What are the reservations of the Western investors?
Though the dream project of the Crown Prince has huge aspirations, the western world will be closely looking at the execution because the previous projects have not been very successful.
The King Abdullah Economic City in Rabigh, which was built to house about 2 million people, hardly has 5,000 permanent residents, according to the Capital Economics report. The Kingdom ranks 94th out of 190 nations in the World Bank’s ranking in ease of doing business. Its ranking is way lower at 158, in trading across borders. Hence, for this project to be successful, Saudi Arabia will have to make a lot of changes to become business friendly.
Though the Crown Prince has promised that NEON will operate independently, without any interference from the “existing governmental framework”, investors will want to see it being implemented.
After all, it was only last month that the Saudi Arabia allowed women to drive, the last nation in the world to do so.
The Crown Prince, however, has promised that the oil-rich nation will be shifting to a more moderate version of Islam. If he follows his words with actions, then maybe he has a winner in his hands.
With all the technology being touted, will digital currencies also find a place in it?
This is just a thought, that if the city is being planned for dreamers, wouldn’t it be nice that instead of using the age-old fiat currencies, Saudi Arabia leads by example and allows only cryptocurrencies to be used in NEOM.
How can we benefit from this news?
As traders, we look for an opportunity in every news that we read. Though a long-term prospect, but a good one nonetheless.
The Tadawul All Share Index (TASI) of Saudi Arabia mirrors the performance of crude oil and rightly so. After all, the Kingdom gets a Lion’s share of its revenues from oil. Therefore, while most stock markets around the world are way above their 2007-2008 highs, Saudi Arabian stock markets are struggling.
Currently, the TASI is about 40% below its 2014 highs, when crude oil was ruling above $100 per barrel.
However, we believe that the bottom is in place for crude oil and it is likely to rally in 2018. Also, if the Crown Prince can follow up this announcement with some concrete action, the index should recover. Therefore, we can put a small portion of our portfolio into an ETF which has a significant exposure to Saudi Arabia.
KSA iShares MSCI Saudi Arabia Capped ETF offers us an opportunity to access the growth in the Saudi Arabian market.
Since its launch, the ETF has largely been range bound between $20 and $27. Currently, it is falling towards its critical support of $24. The ETF has not broken below this level in 2017. Therefore, we can buy KSA around $24 levels, once it shows signs of stabilization.
If the ETF breaks out and closes above the range, its next target is $34. We can keep an initial stop loss of $19. Our risk to reward ratio is 1:2.
However, this is a long-term investment and a contrarian bet. We are trying to buy a possible future turnaround of a nation, which currently is struggling with the impact of low crude oil prices.
Risks to our assumption
Our trade is based on two important assumptions. One, crude oil prices will move higher next year and second, the Crown Prince will implement his Vision 2030 plan.
However, NEOM needs huge investment. If crude oil prices plunge, then Saudi Arabia will struggle to fund this project. Additionally, private investors will also shun it. As a result, the project will fall into a limbo, hurting our investments.
The geopolitical tension in the region can pose a challenge for successful completion and implementation of this project.
Featured image courtesy of Shutterstock.
Going Green: An Investor’s Guide to Cannabis Stocks
The war on marijuana is slowly coming to an end, and don’t investors know it. Very few industries have captured the imagination of Wall Street and Main Street quite like cannabis. With legalization sweeping the continent, many investors believe they are on the cusp of a generational opportunity that cuts across the medical, consumer goods and lifestyle industries.
The past 18 months have featured several watershed moments for the cannabis industry. The most profound moment came on election day, when seven U.S. states legalized recreational marijuana. North of the border, the Canadian government recently announced it will fully legalize recreational weed on July 1, 2018, some 17 years after it sanctioned medical marijuana.
These seismic shifts in public policy have left marijuana stocks seeing green, leading to an outpour of support in the mainstream investment community. But before investors get high off marijuana stocks, it’s critical to get educated about the industry. This will help separate fact from fiction in a sector brimming with more confidence than its fundamentals say it should support at the moment.
Legalization: Where We Stand
Seven states legalized marijuana in some form during the November 8 election. California, Maine, Massachusetts and Nevada voted in favor of recreational weed, while Arkansas, Florida and North Dakota backed legalizing medical marijuana.
From an investment perspective, much of the excitement emanates from the four states that legalized recreational cannabis. California is widely regarded as the proxy for the marijuana industry. If cannabis can succeed here, it can succeed anywhere.
Colorado has also given investors a good indication of how cannabis reform can generate growth. The sale of recreational marijuana topped $1.6 billion in 2016. That translates into $200 million in tax revenue for the state.
Though legalization has been a resounding success in Colorado, the outcome is only a fraction of what California can achieve. For starters, California is eight times bigger, and if it were its own country, it would be the world’s sixth largest economy. California’s path from legalization to business generation will have a direct impact on the pot debate across the country.
The state has already vowed to fight a recent federal crackdown on recreational use, with an unusual alliance of government officials and the cannabis industry quickly taking shape. That’s because state lawmakers realize that marijuana is big business and a potential boon to the local economy. The November referendum also convinced state lawmakers that a huge swathe of the population was in full support of legalization.
Other States to Watch
Investors concerned about the federal ban on cannabis should take solace in the fact that the legalization debate is heating up across the country. In addition to the eight states that have fully legalized recreational cannabis, seven others are debating its future. The legalization debate is germinating in Delaware, Rhode Island, New Jersey, Vermont, Missouri, New Mexico, Kentucky and Texas, a sign they could be next headed to the polls.
Legalization was barely struck down in Arizona last November, with 51.3% of state residents voting against Proposition 205, a statute that would have permitted recreational use.
Source: Business Insider. States Where Marijuana Is Legalized.
There’s just as much excitement about marijuana in Canada, which is expected to fully legalize recreational use of the plant in the not-too-distant future. In early April, the federal government filed an Act to Amend the Controlled Drugs and Substances Act with the legislation officially introduced two days later. Justin Trudeau’s government is expected to implement the legislation by July 2018.
Although Canada became one of the first countries to legalize medicinal marijuana back in 2001, the nation’s marijuana industry is only worth about $100 million (keep in mind, Canada is one-tenth the size of the U.S. in terms of population and GDP).
Industry players are now awaiting provincial legislation on who will be allowed to sell recreational cannabis. To date, 40 marijuana licenses to grow the plan have been granted by Health Canada. Most of these companies are already sanctioned to sell marijuana to patients via mail-order system.
Marijuana Industry Growth and Future Potential
Perhaps no other industry has languished from pent-up demand more than marijuana. In the United States, the plant has been outlawed at the federal level since 1937. That’s 80 years of pent-up demand being met by the black market. During this period, there were few investment opportunities up until the recent growth of medical marijuana companies.
In just one year, marijuana has gone from an obscure and esoteric industry to a multi-billion-dollar enterprise that has resulted in the very first exchange-traded fund (ETF) being issued. The Horizons Medical Marijuana Life Sciences ETF (HMMJ) began trading on the Toronto Stock Exchange in April, ushering a new era for marijuana investments.
According to Arcview Market Research, revenues from legal marijuana sales reached $6.7 billion in 2016, an increase of 30% from 2015. Sales should rise at a CAGR of 25% through 2021 to reach $20.2 billion. All this, and only around half of U.S. states have legalized marijuana to some degree. Analysts say that only broadband internet and cable television had a bigger growth trajectory than cannabis.
In Canada, legalized recreational weed could ignite a nearly $9 billion industry, eclipsing the combined sale of beer, wine and spirits, according to Deloitte. An estimated 600,000 kilograms (more than 1.3 million pounds) of weed will need to be produced to meet the expected demand. That’s far more than the country’s existing licensed producers are capable of growing for medicinal uses.
Clearly, there’s plenty of reason to be bullish on marijuana. The industry is already drawing parallels to the dot-com era, which provided value investors with a rare opportunity to generate enormous wealth in an extremely short period.
How to Invest in Marijuana
In terms of growth, very few industries can compare to cannabis. Like other industries, the leading marijuana companies can be bought and sold as stocks on the open market. In North America, these stocks can be found on the Nasdaq, Toronto Stock Exchange, TSX Venture Exchange and U.S. Over-the-Counter (OTC) market. Marijuana stocks traded Over-The-Counter contain the following symbol: OTCMKTS.
OTC is a decentralized market where investors can trade with one another through email, telephone and other electronic means. In an OTC environment, the dealer acts as the market maker by quoting prices at which they are willing to buy or sell a particular stock. An OTC trade can be carried out without others being aware of the price at which the transaction was made.
Investors who wish to access OTC securities must open an account with a broker that allows Over-The-Counter trading. Since OTC securities are unlisted, there is no central exchange governing the market. This essentially means that all OTC trades must be placed through market makers, a type of broker-dealer firm that competes for customer orders. Typically, OTC securities can be traded on either a discount brokerage or full-service brokerage, including online trading accounts.
Just about any type of pharmaceutical or marijuana stock can trade on the OTC market. OTC provides access to companies ranging from large-cap conglomerates to small and micro-cap growth companies. Since most marijuana stocks are still in the early-stage or developmental phase, they typically do not qualify for the OTCQX Venture Market, which is the home of OTC stocks that are generally considered to be higher quality investments.
Companies listed in the OTCQB exchange are current in their reporting to a major regulator and have greater information availability to investors. Companies that are listed under the Venture Exchange have a green checkmark on the official OTC website indicating their information is verified. “Verified” securities are those whose profile has been confirmed by a representative of the OTCQB within the last six months. A growing number of marijuana companies have already made their way to the OTCQB.
It should also be noted that although investing in OTC stocks is more accessible than ever before, this avenue is considered riskier than conventional exchanges. That’s because many of the companies on the unlisted exchanges are very small, making them prone to wild fluctuations and added volatility. These characteristics define most marijuana stocks regardless of the exchange in which they are listed.
Investors trading marijuana stocks Over-The-Counter or through a conventional exchange should generally avoid companies with very little information. These companies may be extremely illiquid, thereby adding unnecessary risk to your portfolio.
The Marijuana Index
The Marijuana Index is one of the easiest ways for investors to keep track of North America’s most prominent cannabis companies. The index and its subcomponents track the leading stocks operating in the legal cannabis industry in the United States and Canada. Naturally, the index is divided into two country sub-indexes: the U.S. Marijuana Index and the Canadian Marijuana Index. Each company tracked is assigned to either index, depending on the location of their primary business operations.
All three indexes began trading January 2, 2015, and were given an inception value of 100.00 points. The Marijuana Index is equal-weighted, which means each stock is granted the same importance as others in the basket. This is also the case for the U.S. and Canadian sub-indexes. The indexes are rebalanced on a quarterly basis on the last day of March, June, September and December.
As of Oct. 25, 2017, there were 311 companies listed in the Marijuana Stock Universe.
The U.S. Marijuana Index is an equal-weighted benchmark of the country’s top-20 cannabis companies. These companies, and their associated symbol, are presented below:
|Terra Tech Corp||TRTC||120.96m|
|Solis Tek Inc||SLTK||42.03m|
|Marapharm Ventures Inc||MDM:CNX||85.39m|
|Kush Bottles Inc||KSHB||108.87m|
|Innovative Industrial Properties Inc.||IIPR||68.40m|
|GW Pharmaceuticals Plc||GWPH||2.62b|
|Golden Leaf Holdings Ltd||GLH:CNX||62.82m|
|CV Sciences Inc.||CVSI||19.31m|
|Cannabics Pharmaceuticals Inc||CNBX||79.01m|
|Cannabis Sativa Inc||CBDS||55.60m|
|The Canadian Bioceutical Corporation||BCC:CNX||111.98m|
|Axim Biotechnologies Inc||AXIM||323.83m|
The Canadian Marijuana Index is a gauge of ten of the top-twelve marijuana stocks traded in Canada. This list includes:
|Canopy Growth Corporation||WEED:CA||2.23b|
|CannTrust Holdings Inc.||TRST:CNX||393.49m|
|The Hydropothecary Corporation||THCX:CA||158.72m|
|Tetra Bio-Pharma Inc.||TBP:CA||77.01m|
|OrganiGram Holdings Inc||OGI:CA||306.57m|
|Namaste Technologies Inc||N:CNX||40.65m|
|Cronos Group Inc.||MJN:CA||445.70m|
|Maricann Group Inc.||MARI:CNX||101.31m|
|Newstrike Resources Ltd.||HIP:CA||128.55m|
|Supreme Pharmaceuticals Inc.||FIRE:CA||271.94m|
|Emerald Health Therapeutics Inc.||EMH:CA||137.03m|
|CanniMed Therapeutics Inc.||CMED:CA||262.08m|
|Cannabis Wheaton Income Corp.||CBW:CA||205.06m|
|Aurora Cannabis Inc.||ACB:CA||1.09b|
|Abcann Global Corporation||ABCN:CA||110.59m|
An Introduction to Marijuana Industries
The marijuana industry is more diverse than it appears at the surface. Although weed growers continue to receive most of the headlines, the industry features a large cross-section of businesses that span nearly a dozen sectors. In the following, we introduce investors to 11 industries operating within the broader marijuana sector (source: The Marijuana Index).
Agricultural Technology: The Agricultural Technology industry includes companies that contribute to the production and cultivation of marijuana by providing technologies, equipment and supplies to grower operations. Companies: Scotts Miracle-Gro Company (SMG), Zerez Holdings (ZRZH), Solis Tek Inc. (SLTK)
Pharmaceutical/Biotechnology: The Pharmaceutical/Biotechnology industry accounts for businesses focused on the research and development of pharmaceutical drugs and products involving cannabinoids. This industry represents the largest share of the U.S. marijuana market. Companies: GW Pharmaceuticals Plc (GHPH), Insys Therapeutics Inc. (INSY), Axim Biotechnologies Inc. (AXIM).
Consumption Devices: The Consumption Devices industry includes companies involved in developing and selling personal consumption devices, such as inhalers, for consumers of cannabis. Companies: Namaste Technologies Inc. (N:CNX), Wildflower Marijuana Inc. (SUN:CNX), Wildflower Marijuana Inc. (WLDFF).
Cultivation and Retail: Cultivation and Retail includes companies that grow and sell marijuana plants and related products. In Canada, this industry is dominated by licensed producers. Companies: Canopy Growth Corporation (WEED:CA), Aurora Cannabis Inc. (ACB:CA), Cronos Group Inc. (APHQF).
Hemp Products: The Hemp Products industry is primarily concerned with the production and sale of hemp and related products. Hemp is a member of the same plant species as cannabis, but has a lower concentration of THG and a higher concentration of non-psychoactive compounds. This makes it suitable for various products, such as paper, textiles and clothing. Companies: Medical Marijuana Inc. (MJNA), Earth Sciences Tech Inc. (ETST), Lexaria Bioscience Corp (LXX:CNX).
Investing and Finance: Companies involved in the investment and finance of cannabis, such as holding companies and asset managers, are also part of the dynamic marijuana sector. Companies: CannaRoyalty Corp (CRZ:CNX), First Harvest Corp (HVST), Amfil Technologies Inc. (AMFE).
Marijuana Products: The Marijuana Products industry is comprised of companies that are involved in the development and sale of marijuana-infused products, such as drinks, oils and lotions. Companies: Cannabis Sativa Inc. (CBDS), Radient Technologies Inc. (RTI:CA), Lifestyle Delivery Systems Inc. (LDS:CNX).
Other Ancillary: This industry consists of companies that contribute to the broader cannabis industry and that do not fit any of the other categories. Examples include companies that produce breathalyzers and testing kits, cannabis clinics and marijuana vending machine developers. Companies: Canada House Wellness Group Inc. (CHV:CNX), Cannabix Technologies Inc. (BLO:CNX), Lifeloc Technologies Inc. (LCTC).
Real Estate: Companies that develop, own or lease commercial property for the purpose of cannabis business are part of the marijuana Real Estate industry. Companies: Praetorian Property Inc. (PRRE), Innovative Industrial Properties Inc. (IIPR), Grow Condos Inc. (GRWC).
Secondary Services: The Secondary Services industry consists of businesses that provide general consulting and business services to marijuana growers and retailers. Consulting services include market research, business development, branding and logistics. Companies: Cannagrow Holdings Inc. (CGRW), Novus Acquisition and Development Corp (NDEV), Americann Inc. (ACAN).
Technology and Media: The Technology and Media industry includes companies that provide software and media solutions to cannabis businesses and consumers. These services include enterprise software, e-commerce services and trading platforms for cannabis companies. Companies: Helix TCS Inc. (HLIX), Eco Science Solutions Inc. (ESSI), Bang Holdings Corp (BXNG).
Despite all the promise of recreational weed, most viable marijuana investments are concentrated in the medical biotechnology/pharmaceutical industry – at least for now. Investors looking for an immediate impact on their portfolio are more likely to succeed with a medical grower.
However, recreational weed is expected to be a huge money maker in the not-too-distant future. Favorable government policies, steadily growing public support and a burgeoning grower industry make recreational marijuana a promising enterprise across North America.
How to Build a Green Portfolio
Many of the same strategies involved in building a traditional stock portfolio also apply to the marijuana sector. Things like asset allocation, long-term strategy and deep fundamental analysis are critical for long-term success. At the same time, however, the marijuana industry has several unique features that investors need to grasp.
For starters, the marijuana industry is inundated with speculative investments and overhyped stocks that don’t actually have a viable business model. This isn’t always apparent when one looks at the relative success of marijuana stocks. This means many marijuana investments are overvalued.
Marijuana stocks are also highly volatile. After surging to record highs following legalization, many leading stocks found themselves in the doldrums in the first quarter as political uncertainty undermined confidence in the industry.
Against this backdrop, the following strategy is likely to yield the best outcome for investing in this rapidly growing sector.
1. Diversification is key
Diversification is the cornerstone of investing. For a sector like marijuana, where picking winners and losers isn’t easy, diversification carries even greater significance. Right now, there are over 250 stocks in the marijuana sector. Among them are future billion-dollar companies as well as duds that will eventually file for bankruptcy. A diversified portfolio of marijuana securities is therefore necessary to survive what could be a volatile few years for the sector.
2. Gain indirect exposure
There are both direct and indirect ways to gain exposure to a sector. Although most marijuana enthusiasts are rushing to growers and retailers, they should also consider other companies in the value chain that make the business possible in the first place. These companies are certainly benefiting from marijuana, but are not tied to it and thus won’t go bust if the sector hits a snag.
A company like Scotts Miracle-Gro (SMG) provides the type of indirect exposure our portfolio needs to survive volatile turns in the market cycle. SMG is not a marijuana stock, but provides specialty fertilizer and supplies to the pot industry. In other words, it is benefiting from the sector’s growth without being completely tied to it.
3. Conduct fundamental analysis
There are a lot of cool sounding marijuana stocks at play right now, but that shouldn’t be your criteria for investing. Nor should you rely on a hunch for picking a winner in a sector prone to wild price fluctuations. Remember: you are not picking from the S&P 500, but from a batch of companies that have an extremely limited track record in the market.
You should therefore come to terms with the stock’s intrinsic value (i.e., what it’s really worth). This means reviewing its business model, profitability, revenue, return on equity and overall growth strategy. In other words, read the stock’s financial statement carefully.
4. Don’t wait for a pullback to enter the market
Cannabis stocks may be volatile, but that doesn’t mean you should wait for a pullback before you invest. Although this is a common strategy investors employ, it rarely pays off. It may be painful to buy a share at 52-week highs, but it’s even worse to watch that company defy your expectations of a pullback. The good news is marijuana investments are still new, so the good ones still have a long way to go before they reach their ceiling.
5. Develop a long-term plan
It’s perfectly acceptable to allocate a certain portion of your portfolio to speculation (i.e., choosing stocks you believe can be bought now and sold at a substantial gain later on). However, your overall portfolio strategy should be based on long-term objectives. This is the only true way to maximize investment success.
As a nascent industry, marijuana offers plenty of long-term growth. There’s lots of reasons to be bullish over its long-term prospects. This alone should deter investors from being too short-sighted with their cannabis portfolio strategy.
6. Know that you’re investing in an industry with top notch growth
The reason many people enter the cannabis market is the realization they may be investing in a once-in-a-lifetime opportunity. Legalization is long overdue, and pent-up demand is not like anything we’ve ever seen. This has been clearly reflected in the industry’s rapid acceleration in such a short period. The growth and widespread adoption of legal cannabis in all its forms should serve as a motivator for investors looking to tap into this sector.
Legalization and the Future of Marijuana Investments
Marijuana legalization across much of North America is a paradigm shift both in terms of public consciousness and public policy. Although the path forward will be riddled with uncertainty, the general trend is leaning toward looser regulation of recreational cannabis and increased support for medical research.
The marijuana sector is booming right now, but is trading at only a fraction of its full potential. The huge sales numbers we saw in 2016 are likely a sign of things to come, as the sector benefits from surging demand and growing mainstream acceptance of cannabis use. These factors could drive the next bull market in the marijuana industry – one that could rival the the dot-com boom.
From an investment perspective, cannabis stocks can still be had for relatively cheap. Like any breakout industry, there are a lot of duds out there trying to capitalize on the momentum. But there’s plenty of solid picks with fantastic growth prospects for investors with a little courage and a lot of patience.
 Trey Williams (February 12, 2017). “Marijuana tax revenue hits $200 million in Colorado as sales pass $1 billion.” MarketWatch.
 Debra Borchardt (April 13, 2017). “Canada Take Big Steps Towards Creating $8 Billion Legal Marijuana Industry.” Forbes.
 Debra Borchardt (January 3, 2017). “Marijuana Sales Totaled $6.7 Billion In 2016.” Forbes.
 Investopedia. Over-The-Counter Market.
 Kesavan Balasubramaniam. “How do I buy an over-the-counter stock?” Investopedia.
 Jeremy Lutz (March 2, 2017). “7 Essential Tips To Succeed With Cannabis Stocks.” Ino.com.
Buy FDS, PPC, BERY, and IIVI for the short-term
The US tax reforms received a major boost on Thursday when a measure approved by the Senate, enabled the Republicans to proceed with the tax cuts, without the support of the Democratic party. Suddenly, passage of the tax cuts looks more plausible.
- Positive news is flowing on the tax reforms front.
- Tax reforms are likely to boost the S&P’s earnings significantly
- The stocks are likely to remain buoyant in the final quarter of the year
- Buy FDS
- Buy PPC
- Buy BERY
- Buy IIVI
Goldman Sachs believes that if corporate tax rates are reduced from 35 percent to 20 percent, it will increase the annual per-share earnings of the S&P 500 by $15. Consequently, the stock market will look a lot less richly valued on a forward price to earnings basis.
With this bullish backdrop, the stock markets are likely to remain buoyant in the short-term. However, we don’t advise investing for the long-term at these levels. We believe that the markets will fall within the next few months, offering an opportunity to buy stocks at lower levels.
Therefore, we shall trade this market and attempt to ride the momentum. We have selected stocks that are making new 52-week highs because they have a favorable tailwind and are likely to participate in the rally, along with the S&P 500.
So, without further ado, let’s check out the stocks.
FDS – Buy 185.76, Stop Loss (SL) 174, Target 204 and 216
The stock’s history shows that it tends to rally for a few years and then enters into a shallow correction or consolidation. We find three such instances in the past decade. The stock has been in a consolidation since end-2015. Two attempts, one in September 2016 and the second in March 2017, failed to sustain the breakout.
However, the stock again broke out in end-September and extended the rally last week. It is likely to start a new uptrend now and we plan to hop along for a ride.
The stock broke out of the bullish ascending triangle formation on September 26. Thereafter, it faced resistance at the $184 levels, from where the bears attempted to sink the stock, back into the triangle.
However, the bulls provided support at the $176 levels and the stock broke out of the overhead resistance on Friday. It is now likely to rally towards its first target objective of $204. The pattern target on a breakout from the ascending triangle, however, is higher at $216.
Therefore, we recommend a buy on the stock at the current levels with a stop loss of $174. We don’t want to hang on to the stock if it falls back into the triangle once again. The stock has a risk to reward ratio of 1:1.5 at the first target objective and a ratio of about 1:2.5 at the second target objective.
PPC – Buy 31.04, SL 27, Target 37
The stock rose sharply from end-2012 to end-2014. Thereafter, it corrected and entered into three-year long consolidation, during which, it remained range bound between $17 on the lower end and $27.5 on the upper end. PPC formed a double bottom at $17.3 levels and the pattern completed when the stock broke out of $27.5 in mid-August of this year. Subsequently, the stock completed a successful retest of the breakout levels of $27.5 and rose to multi-year highs last week. We, now, expect the stock to start a new uptrend.
The stock broke out of the overhead resistance on August 15. However, the stock faced considerable resistance following the breakout. It remained sandwiched between $28 and $30 for almost two months. Finally, on October 18, the stock broke out of the range and extended its rally on October 20.
It has a pattern target of $37, which is close to the lifetime highs. There is no significant resistance in between, therefore, we recommend a buy on PPC at the current levels of $31.04. The stop loss can be kept at $27, a level not seen for more than two months. The trade offers us a risk to reward ratio of about 1:1.5.
BERY – Buy 59.88, SL 56, Target 67
BERY has been in a strong uptrend since 2016. It has a clear pattern. It rallies and then corrects towards the 20-week exponential moving average (EMA) and occasionally to the trendline drawn. On completion of the correction, it again resumes its uptrend.
Recently, the stock had again corrected to the trendline, from where it found support and broke out to new lifetime highs last week. We expect this trend to continue until the stock breaks and closes below the trendline support. We want to enter this stock as it has re-established its uptrend.
The stock broke out of the overhead resistance of $58.95 on October 06. Afterwards, it successfully retested the breakout levels and has resumed its uptrend. We can buy the stock at the current levels of $59.88 and keep a stop loss of $56. We shall close the position if the stock falls below the trendline. Our target objective is $67. The trade offers us a risk to reward ratio of about 1:2.
IIVI – Buy 43.3, SL 39, Target 52
The stock bottomed out in October-2014 around the $10.78 mark. Thereafter, it started a new uptrend that continued till February of this year, after which, the stock entered a period of correction. $41.1 has acted as a stiff resistance on the way up. However, last week, the stock broke out to new highs and we expect it to continue higher.
On the daily chart, we find that the stock has formed a bullish inverse head and shoulders pattern. The pattern completed with a breakout of the neckline on September 27. Thereafter, the stock successfully completed a retest of the neckline. The stock has a pattern target of $52. We want to enter the stock at the current levels and keep a stop loss of $39, which is just below the low created on October 19. This gives us a risk to reward ratio of greater than 1:2.
These Stocks Have Bullish Chart Patterns
The S&P 500 had its second weekly closing above the 2500 levels. However, it formed a doji candlestick pattern on the weekly chart last week, which shows that the bulls and bears are in equilibrium.
- Though the S&P is losing momentum, it remains in an uptrend
- Buy MOG.A
- Buy SMMF
- Buy MODN
- Buy PSTG
While the bulls have not been able to sustain the momentum above 2500, the bears have not been able to sink the index. As long as the index trades above 2480, it remains bullish and we can expect select individual stocks to outperform.
It is difficult to call a top in the market. Therefore, until the market breaks down, we shall look for stocks that are likely to continue their uptrend.
However, as the markets are due for a correction, traders should reduce their position size to less than 50% of normal. As the market moves higher, the stop losses should be trailed higher to lock in the paper profits, because the market can turnaround quickly from these levels.
MOG.A – Buy 83.63, SL 76, Target 100
The stock has broken out to new lifetime highs with strength. We find a V-shaped recovery after the fall from the highs in October 2014. We believe that the stock has started a new uptrend and is likely to continue higher towards its first target objective of $100, though the pattern target is $120.
However, if the stock again falls below the breakout levels of $79, it will signal a failed breakout. Therefore, we shall keep a close stop loss to protect our position.
On the daily chart, we find that the stock is trading inside an ascending channel since February of last year. The stock has mostly traded close to the middle of the channel, barring two occasions.
Once, in November of last year, it attempted to breakout of the channel but failed. From there, it fell to the lower end of the channel by end-March of this year. The current leg of the up move is likely to carry the stock at least to the upper end of the channel, close to $90 levels, post which, it will either breakout of it or return to the middle of the channel and continue its uptrend.
As the stock is at lifetime highs, we shall buy it at the current levels and on any dips to $80. Our stop loss is $76, because we don’t want to hang on to the stock if it doesn’t sustain the new lifetime highs. Our profit objective is $100 and long-term objective is $120, as long as the stock sustains above the trendline support of the channel.
The risk on the trade is $7.63, whereas, the reward is $14, if the stock moves according to our expectations.
SMMF – Buy 25, SL 22, Target 30
The stock is in an uptrend because it continues to make higher highs and higher lows. It made a high of $30.06 in December of last year, after which it corrected sharply. However, the correction ended around the $20 levels, post which the stock remained range bound. Last week, the stock broke out of the range with force. We expect a retest of the highs once again.
The daily chart shows the momentum behind the stock. It has quickly risen from $22 to $25 levels. It has a small resistance at $27, post which it is likely to retest the highs. Therefore, we shall buy the stock at the current levels and on dips to $24 levels. Our SL will be $22. The risk is $3, whereas, the reward possibility is $5.
MODN – Buy 14.5, SL 12, Target 18.5
The stock had been range bound for the past four years. It has formed a nice base around the $7.5 to the $13 mark. Though the stock broke out of the range in May of this year, it could not rally higher. It remained stuck in a tight range for more than three months. However, last week, the stock broke out of the range, which should start a new uptrend in it. Our target objective is $18.5, which is equal to the depth of the range.
In end-May of last year, the stock had broken out of the range, however, it faced stiff resistance at the $14 levels, from where it turned down once again in early-August. From then to early-June of this year, the stock remained within the range.
This year, the stock broke out of the range in early-June, but could not gain momentum. It was stuck in a tight range for almost four months. However, on Thursday of last week, the stock broke out of the tight range and followed it up with further gains on Friday.
With the breakout above $14, the stock has started a new uptrend, which should carry it to $18.5 levels. Therefore, we can buy the stock at the current levels. Our bullishness will be invalidated if the stock falls below $12, which should be the stop loss. In this trade, the risk is $2.5, while the reward possibility is $4.
PSTG – Buy 15.65, SL 14, Target 20
The stock has been range bound between $9.65 and $15.15 since 2016. Last week, the stock broke out and closed above the range. We, therefore, expect the stock to start a new uptrend and move towards its target objective of $20. However, if the stock again falls back into the range, it will signal a failed breakout and it will invalidate our bullishness.
The stock broke out of the range on Thursday, however, it could not sustain the gains and closed at $15.02 levels. Nevertheless, on Friday, the stock again broke out of the overhead resistance, which shows the buying support for the stock at lower levels. The stock has a minor resistance at the $18 levels, post which it is likely to rally towards its pattern target of $20. However, if the stock again falls below the range, it will become negative. Therefore, we shall keep our stop loss at $14 levels. In this trade, we risk $1.65 to earn a possible reward of $4.35.
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