Most of the time, my stock selections hail from sectors and industries that rank high in terms of technical performance. However, I don't use sector strength as my prime screening criterion. There is always room in a portfolio for a leading stock -- even if the rest of its industry peers are laggards.
There's another reason for scanning weak industries: It's often possible to identify stocks that are currently weak performers, but may hold potential. That's true both technically and fundamentally.
The worst performing S&P 500 large-cap sector is telecom. This month, it has advanced just 0.42%. To give an idea of how badly it lags, the second-worst sector is utilities, which has a January gain of 2.77%.
AT&T is set to report its fourth quarter after the close on Thursday. Even if it were to deliver spectacular results and gap higher, the stock would still have plenty of work to do before showing any kind of technical buy signal.
Frankly, neither DJIA telecom interests me at the moment, as they are not getting the kind of moving average support I like to see in a stock that has pulled back from prior highs. That's not to say they won't be viable buy candidates at some future date -- but for now, they are best left alone.
Instead, my attention was drawn to a mid-cap, TW Telecom (TWTC), which provides telecom services in markets around the country. Like its larger peers, this stock is also consolidating, but unlike AT&T and Verizon, TW is trading above key moving averages, and is within striking distance of its previous high.
The company was founded as Time Warner Telecom, a joint venture of Time Warner and U.S. West. The current iteration of TW Telecom went public in 1999.
Earnings growth resumed last year, after several quarters in a row with no year-over-year gains. The company is expected to report its fourth-quarter results sometime early next month. Analysts are anticipating income of $0.15 per share on revenue of $376.80 million. Those would be improvements on the year-ago quarter.
For 2013, consensus estimates call for earnings of $0.55 per share, up 55% from 2011. For this year, analysts are forecasting income of $0.70 per share, which would mark a gain of another 27%.
TW Telecom is currently somewhat extended. The stock closed Wednesday at $27.18, 5.6% above its 50-day line and 9.5% above its 200-day. A pullback to a short-term moving average may offer the next buying opportunity.
From the wireless telecom subsector, American Tower (AMT) is a technical standout. The stock has been in a sustained uptrend since August, 2011. It has pulled back to its 50-day moving average a few times since then.
However, a deeper correction could be constructive, flushing out investors and traders lacking in conviction, and setting the stage for bargain shoppers to scoop up shares. For now, however, it's out of purchasing range, meaning that buyers risk getting shaken out in even a small pullback.
Analysts are expecting earnings to have grown 71%, to $1.69 per share, in 2012. The company is expected to report last year's results next month. This year, the operator of towers for mobile telecom, TV and radio is expected to earn $2.12 per share, a gain of 25%.