Tuesday, May 27, 2014

Stocks to Sell in May...or Not

A few weeks back in “Seasonal Saw” posted here on May 2nd, I discussed the merits of following the of-repeated stock market saying “sell in May and go away.”  I also offered a few tidbits on some technical indicators, which I use to filter through those stocks that should be held for better days and those that are best cut loose with the Memorial Day balloons.  I use the Commodity Channel Index to find stock that might be overbought or oversold and then use the Moving Average Convergence / Divergence line as well as the Average Directional Index to determine if the stock is poised to continue or reverse the trend.  I found five stocks in the energy sector that look overbought or are otherwise poised for a stumble.

The natural gas sector has had a good run.  The NYSE ARCA Natural Gas Index has increased 54% over the past two years.  However, I note that the index has increased only 16% in the most recent half of that two-year period, suggesting that momentum is slowing behind the stocks in this group.  It is no surprise then that a screen for overbought stocks turned up two natural gas companies.

Teekay LNG Partners, LP (TGP:  NYSE) provides ocean transportation services to producers of liquid petroleum and petrochemical gases using a fleet of seventy-five carriers and tankers.  The company earned $158.5 million in net income on $403.7 million in sales in the twelve months ending March 2014.  Even better, sales converted to an even higher $188.4 million in operating cash flow.  Investors have been flocking to the stock, which set three-year high in early May. 

A review of historic trading patterns suggests the stock is overbought at the present level, but that it continues to have sufficient upward momentum to reach even higher prices in the near-term.  This would normally suggest that investors hold onto shares for a while longer.  However, I also noticed that in the last two year TGP appeared to languish between May and October, just as the calendar effect forewarns.  Thus it makes sense to lighten up on TGP for the time being and then use periods of weakness to rebuilt positions.  The stock has dividend yield of 6.3% at the current price level.  Reducing average price will only enhance that yield.

Another member of the midstream natural gas segment, Tallgrass Energy Partners (TEP:  NYSE) is in a similar situation.  Tallgrass operates natural gas pipelines and storage facilities with approximately Wyoming, Colorado, Kansas, Missouri and Nebraska.  Over the past twelve months the company has generated $71.3 million in cash flow from operations on $292.4 million in total sales.  Earlier in May the company filed a registration statement to sell $1 billion in common units.  The news was well received.  The offering could have an interesting impact on trading in Tallgrass shares it is a closely held company with a relatively shallow float given total shares outstanding.

Overbought as Tallgrass appears to be at the present price level, our favorite technical indicators suggest there is more upside to come.  The stock formed a double-top breakout in early May, pointing to a potential target of $59 per share.

Bolt Technology (BOLT:  Nasdaq) caters to the energy industry with marine seismic data acquisition equipment and underwater remotely operated robotic vehicles.  In the most recently reported twelve months the company earned a handsome $9.8 million in net income on $71.6 million.  Bolt generated $10.3 million in operating cash flow during this year period, providing strong support for a 75% payout ratio. 

Bolt’s stock has had a good run, but has lost some ground since record high prices set in the beginning of the year.  Last week the stock attempted a recovery and I noted the formation of what is called a ‘low pole reversal.’   This is a formation in what is called a ‘point and figure chart.’  The reversal implies that the supply that was making the prices fall has been absorbed and demand is taking over.  That should save the stock from falling to the nearest price support around the $12 price level.  Indeed, the pattern is an alert that higher prices could be seen in the future.  As promising as this may seem, there is nothing to suggest the stock is in another drive higher that will last for any extended period of time.  So it might make sense to take some profits and wait for periods of price weakness to rebuild positions.  That will help reduce overall basis and enhance the dividend yield. 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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