Relative Strength Winners & Losers: MCD, HD, VZ, AMZN, BAC

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December 20, 2011 at 09:40 AM

BY Dennis Hobein - Contributor, Stock Traders Daily

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As the year continues to wind down, news flow and trading volume will steadily dry up as we head towards the new year. However, that does not mean that there won‘t be trading opportunities available. In today’s article, we wanted to take a look at a few heavily traded stocks that look to be ending the year on a high note – and conversely, a couple stocks that are falling flat. There is typically a good fundamental reason why a stock is displaying notable relative strength or weakness, which is why the old saying, “the trend is your friend” rings true more often than not.

Investors Have Been Loving It
Since the end of March, shares of McDonalds (NYSE: MCD) have been on auto-pilot, cruising higher in an almost unabated fashion. One explanation for its strength is that it’s looked at as a recession-proof stock, and there is good reason to feel that way. Looking back to the September ‘07 – March ’09 timeframe, which covers the span of the “Great Recession”, shares of MCD returned nearly 12%. During times of economic uncertainty, consumers tend to “trade down” to lower priced option, and MCD is the global leader in the fast food category. This “trade down” effect is evident in its most recent global comparable sales growth figures. For the month of November, comparable sales were up 7.4%, and interestingly, Europe posted an impressive 6.5% increase.

No Place Like Home
One of the more surprising names to land on the relative strength screen was Home Depot (NYSE: HD). It would seem logical to assume that HD’s business would be suffering due to the still weak housing market, but that has not been the case. HD is coming off a very strong “beat and raise” Q3 report from November 15, in which it also raised its quarterly dividend by 16%. It is worth noting, though, that some of this outperformance came from a surge in storm-related products in the New Jersey and South Atlantic regions, due to Hurricane Irene. But, HD also commented that one of its strongest divisions was its Western Division, which obviously wasn’t affected by the hurricane. The company is executing well, is actively buying back its stock, and is taking advantage of some weaknesses of its closest competitor, Lowe’s.

Ringing Up Gains & Yield
Shares of Verizon Wireless (NYSE: VZ) have just broke out to new 52-week highs, which should land the stock on many traders’ desks. There are a few separate catalysts that help explain its relative strength. First, sales of Android-based smart phones are expected to be strong once again, and some analysts have been boosting their Q4 estimates because of this. Also, VZ has been scooping up advanced wireless spectrum licenses, which further enhances its LTE leadership position. Finally, investors have been seeking out high-quality companies that pay hefty dividends, looking to insulate themselves from the volatility in the broader markets. VZ is currently yielding over 5% on its dividend.

Not Exactly on “Fire”
Once a darling among traders and investors, Amazon.com (Nasdaq: AMZN) has been hammered since mid-October. The stock has come under pressure over concerns about whether its new “Kindle Fire” device – which has been selling rapidly – will dramatically pressure its margins; and due to its lofty valuation. Investors have generally been in a “risk-off” mode, and some of the first stocks to get ditched are those with exorbitant valuations. Even after this sharp sell-off, AMZN is trading with a 1-year forward P/E near 90x. Before loading up short, we would point out that the stock, for the moment, has found support at the $180 level. It may be wise to wait and see if it breaks below that level first.

Bank on More Losses?
So far, the “Oracle of Omaha’s” $5 billion bet on Bank of America (NYSE: BAC) from this past August hasn’t played out as planned. On December 19, the stock traded below the psychological $5 level – a price not seen since March 2009. Of course, the country’s largest bank has come under pressure from worries about its exposure to Europe, and to a lesser degree, downgrades from the rating agencies. But, more recently, BAC and other financials have been selling off due to concerns that these firms will soon face stricter Basel III rules, which would require them to hold higher capital buffers. With this confluence of headwinds facing BAC, the stock may be poised for further losses ahead, although the downside risks at this point seem muted since these risks are well known.

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