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Historical Highs, Unemployment, Evergreen Returns

07/23/13 08:05:06 PM
by Billy Williams

Profiling the right stock is vital for you as a trader if you ever want to make stellar returns. Here's one stock that could be an "evergreen" stock.

Security:   MA
Position:   Buy

The market made history on July 19, 2013, by trading an all-time high on reports of lower unemployment and earnings growth. The Dow traded just over 15,465 after four consecutive days of tight price contraction, and by trading higher, it indicates more upside potential. There are, however, few questions that linger in the air. Will this latest rally slow down before ever having the chance to gain any real momentum or will it climb higher and usher in a new economic boom?

While the latest price action by the general market is encouraging, we are still in the middle of the "summer doldrums" where price is usually stagnant and lacks any real volume or strength to make a sustained play. That said, the trend is definitely in the hands of the bulls right now and you don't want to fight headwinds by trying to short the market.

The smart play is to trade on the long side of the market and to find the stocks that are reporting good numbers. These types of stocks also have the added benefit of being in the news, being talked about on the financial networks, and getting a lot of attention. This will attract the big institutions who may feel the need to accumulate more shares, which will increase the likelihood that the share price will rise.

Figure 1. There are two key ways to play MA: A pullback to the 50-day simple moving average or as it trades back up through its price high.
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To refine it even further, stocks that are trending near their all-time price high, or at least their 52-week price high, with compelling fundamentals should be your focus but, particularly, stocks that have a unique durable competitive advantage that makes them an "evergreen" stock.

A durable competitive advantage is an aspect of a company's business model that makes them guarded from competitors trying to enter their market. For example, think of Microsoft's advantage with Windows where the software is the main operating system for all computers manufactured right out of the box. Another one would be Walmart's ability to track its inventory down to the last coffee bean with sophisticated technology that helps turn that inventory over again without it having to sit in a warehouse for long periods of time.

Evergreen stocks are stocks that hold up well in all market environments while fitting the profile of stocks that offer up compelling fundamentals and technical criteria that have the potential to achieve stellar returns.

MastCard Inc., or MA, is a stock that fits that criteria and, as a result, has been trending upward for almost three years.

Figure 2. MA has been strongly trending for three years as the result of its incredible fundamental performance. Now, the trend is set in motion and is likely to continue unless something changes dramatically at that fundamental level. This stock should be on your list of potential long candidates as the summer doldrums draw to a close.
Graphic provided by:
MasterCard Incorporated (MA) provides transaction processing and other payment-related services all over the world. Basically, MA gets a small piece out of credit transactions processed from every approved merchant account in the world making its core business model less likely to get caught up in the wild gyrations of the market as long as consumers are using cards with its logo.

Adding to that impressive record, and enhancing its durable competitive advantage, MA announced in June 2013 that it will make it easier and more efficient for online businesses to process payments through MA. This indicates that MA is making a grab for a bigger piece of the online business space.

There are two ways to play the stock right now: One is to wait for the stock to pull back to the 50-day simple moving average to enter a trade as it resumes its upward movement. The second way is to enter a position as price trades up through its previous price high.

Also, consider using call options because you are still trading in a "summer doldrums" market and the lack of follow through doesn't make for a good risk/reward ratio unless you're using the kind of leverage that call options offer.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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