My stock idea for today stems from a trick of the trade that I have begun to formalize after reviewing most of my 2009 trades. Basically, when you get (a) an institutional quality stock that trades hundreds of thousands, if not millions, of shares per day that, (b) moves up to or close to new highs, preferably after a multi-week basing period, and (c) marches higher at least seven or eight days in a row, you’re usually looking at a “blast-off” of sorts. The stock is a buy on any pullback.
It doesn’t always work out, but my experience tells me 70% or 80% of the time, these simple criteria can help you find at least good short-term trades, if not great longer-term entry points.
One stock that recently showed this type of strength is the bellwether of the natural gas sector–Southwestern Energy (SWN). The stock had been etching a base for eight weeks before it bolted up from its bottom for nine days in a row. And this week, it nosed out to new all-time (all-time!) high ground before easing back … particularly impressive for a commodity stock.
The company is expected to grow earnings 59% in 2010, thanks to a 36% hike in production and improved pricing for its natural gas. Southwestern’s current leader is the Fayetteville Shale formation in Arkansas, which continues to churn out great wells. In fact, that shale formation is really the ruling reason to own SWN … that and the fact that top management that has expanded the firm’s business nearly without fail during the last decade.
With natural gas prices firming up (a breakout above $6 for natural gas would likely forecast higher prices), I think SWN will be a winner in the months ahead. It looks buyable here, though a drop back below 45 would tell you something is amiss.