Rules of the Game: Thickening Targets

 | Jan 11, 2013 | 2:30 PM EST  | Comments
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Earlier this week, I put the spotlight on large-cap names with strong records of earnings stability. That can be a precursor to further price gains. But, as I mentioned in that piece, estimates reflect institutions' current level of confidence in a company, so these also worth a look when you're building a watch list.

Most retail investors assume analysts' estimates are, for the most part, overly optimistic. But expectations can just as easily be wrong on the low side. While I acknowledge estimates are likely to be wrong in either direction, it is still worthwhile to track these as an indicator of a stock's potential.

 A large-cap with outstanding estimates, for instance, is Honda (HMC). For this year, Wall Street has pegged earnings growth at 92% to $2.84 per American depositary receipt. Next year, that's seen growing another 26% to $3.58 per ADR.

Honda has a beta of 1.12, meaning it is more volatile than the broader market. The chart shows regular gap-ups and gap-downs, but that's not a sign of indecision among traders -- rather, it's a reflection of currency exchange, and it is common among ADRs. The stock is consolidating beneath its 52-week high of $39.25, which it hit in March 2012. Shares closed Thursday at $38.17, having advanced 2.2% on news the company would invest $23 million in an Ohio hybrid vehicle plant.

Honda shares are extended from a buy point, holding 13.7% above its 50-day moving average and 15.1% above its 200-day. The next pullback to a short- or medium-term line could offer a fresh entry point.

Another name with outstanding estimates is one I wrote about last week -- Valeant Pharmaceuticals (VRX), which makes treatments for nervous system and cardiovascular disorders. The company is expected to report earnings of $4.52 per share for all of 2012, a year-over-year increase of 54%. This year, analysts see per-share income of $5.64, which would represent a gain of another 25%.

The potential here remains excellent, but Valeant is also extended from a reasonable buy point at this juncture. Watch for a pullback to the 50-day line, or even to the 200-day, for the next buy opportunity.

U.K.-based Ensco (ESV) is another large-cap stock with excellent estimates for the next two fiscal years. The offshore contract driller has market capitalization north of $14 billion, and it trades more than 2 million ADRs per day.

When the company wraps up its 2012 reporting, Wall Street expects earnings of $5.37 per ADR, a gain of 61% over 2011. This year, analysts have pegged Ensco's earnings growth at 31%, or $7.05 per ADR.

The stock rallied to a 52-week high of $62.90 last week, and it has been gradually pulling back. Ensco closed at $61.50 Thursday, 5.6% above its 50-day moving average and 14.5% above the 200-day.

Despite good liquidity, Ensco has a high beta of 1.44. The chart shows wide and loose weekly trading patterns. The stock has struggled since May of 2011, and has only recently gotten some renewed mojo.

The current pullback could be constructive and allow new buyers to enter the stock below the prior high. However, be careful about the volatility. It wouldn't be too difficult to panic and sell in a downdraft. If you buy this stock, keep a close eye on moving-average support.

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