Penn Virginia: Latecomer With Potential

 | Jan 08, 2014 | 9:00 AM EST  | Comments
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Penn Virginia (PVA) is one of many stocks that have risen from the ashes over the past two quarters. This phenomenon is common when markets hit all-time highs and lead many to shy away from the high fliers, hoping instead to cash in on some of the aftershocks.

It doesn't mean, however, that all of these latecomers are doomed to fail when the broader market does finally retreat. Even when they do exhaust themselves, they tend to display even more obvious signs than their more heavily-traded counterparts.

 It's up to us to try to determine which of the latest stocks to join the rally are still worth chasing. The energy sector in particular has garnered a great deal of attention in recent months. As such, it certainly deserves a closer look. Many of my own recent investments have been in related industries due to their recent growth and near-term growth potential. Penn Virginia has caught my eye now.

Penn Virginia is an oil and gas company engaged primarily in exploration, development and production of resources in Texas, although it does branch out further across the South. Over the past two days its shares have rallied strongly to retest breakdown levels from December 6, when it faced its strongest day of selling in 2013. The rally came right off a test of its 50% Fibonacci Fan support level based upon the September to early December rally, as shown on the daily time frame.

Fibonacci Fans offer remarkable levels of support for securities in the midst of a corrective phase, and Penn Virginia was no exception. The question now, however, is how sustainable this rally will be and what sort of upside potential does Penn Virginia have as 2014 unfolds?

In the near term, Penn Virginia is a risky acquisition. The rally off the January 3 lows leaves it extended on the intraday time frames and resistance from December highs poses a threat. The extent of the weekly rally over the past quarter also increases the odds that a higher daily high in the week or two ahead can serve as merely a bull trap before a longer weekly correction follows.

On the other hand, the weekly and monthly charts suggest that Penn Virginia does have a bright future -- at least over the next year or two. This will be particularly true if the stock disappoints short-term traders and does not quickly test nor break December's highs. By failing to push into those highs, it lessens the risk of a bull trap and will give Penn Virginia's shares a better chance to continue to correct

over a period of time. As a result, the odds increase in favor of a stronger weekly breakout a little later down the road, such as off the 50% Fibonacci Fan on the weekly time frame. While a higher daily high in the near term does not rule out the possibility of an earlier upside continuation, it would improve the odds of a successful one.

Penn Virginia has recently received an upgrade by Zachs Investment Research, which now rates the company as a strong buy. As with many of these recent gainers, it has also been the subject of takeover speculation. At this point, I also consider Penn Virginia as a buy and worth accumulating a small-to mid-size position over the next several months. My 18-month target on the company is the resistance zone from late 2010 at $16 a share. This is also approximately the 100% expansion of the late 2013 rally.

Penn Virginia recently acquired a large undeveloped acreage in the Eagle Ford shale formation in south Texas and has further diversified away from dry natural gas development into liquids. It has also been working diligently at costs reductions and it maintains a stable balance sheet. In the leadership department, Penn Virginia promoted its Executive Vice President of Operations, John A. Brooks, to the position of Chief Operating Officer. He took over the role on January 1.

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