Old-School Names Catch a Nice Bid

 | Apr 09, 2014 | 9:53 AM EDT  | Comments
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Last night Alcoa (AA) hit the streets with some pretty good numbers. Until last quarter, even pretty good numbers weren't enough to generate interest in Alcoa. Now, though, it feels as if the stock can do no wrong. It isn't just Alcoa, though. I'm seeing such stocks as Campbell Soup (CPB), Clorox (CLX), Intel (INTC) and Pepsico (PEP), among other old-school names, show up on the momentum scans -- and this isn't just one day, but the past several sessions.

While we are seeing some-follow through from Tuesday's rally in the early going, I still have concerns given the number of these old-school, value-type names and municipal bond ETFs that keep popping up on the momentum scans. These are not the types of names that can carry a rally.

The potential multiple expansion in names like those mentioned, or a strong chart like that of Colgate-Palmolive (CL), can only go so far. Chasing those names would be more a combination of chasing dividend yield and looking for some protection. We're talking about forward price-to-earnings ratios of 20x or more for names growing revenue at only 6% to 8% per year -- and bound to stay that way -- and this simply will not hold buyers' attentions for long.

While I'm not excited about 20x P/E ratios on these names, I still respect the short-term trajectory of the charts. For instance, on Clorox, the daily chart is still very strong. The Commodity Channel Index (CCI) may be pushing a level at which the stock will appear very overbought, but the relative strength index (RSI) is just breaking out to highs along with price. A CCI pushing above 100 and touching 200 signals either a significant trend change or the potential for a short, explosive move. Of course, the term "explosive" must be taken into context: "Explosive" for Clorox is different from "explosive" for First Solar (FSLR) or Facebook (FB).

Clorox (CLX) -- Daily
Source: StockCharts.com

Clorox's $66 mark is the likely trigger, and while I've tempered my expectations for upside "explosive" potential for this stock, I do think a move into the $68.50-to-$70 area is possible before this run is over. Clorox doesn't really have the type of dividend that excites me. However, with a beta of less than 0.5 as compared to the SPDR S&P 500 (SPY), I wouldn't be against put-selling in this name.

The stock shouldn't be going ex-dividend before May -- always a consideration when selling puts -- so selling the April or May $65 puts looks like a possible play. My preferred play, given that earnings is due around April 25, is to sell the May $62.50 puts in the $0.55-to-$0.60 range.

Although it wouldn't make for a huge return, I think old-school names in general will continue to hold up, and Clorox provides a little more than 5.5% room to the downside before it would be intrinsically losing money. My stop would be a close under $60 for the stock. I would actually be willing to own Clorox below $62.50, but above $60, as I believe those support levels would hold.

This week I will look at some of the other names mentioned here for the same opportunity.

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