Conglomerate Stocks Looking Good, Or Are They?

By Cory Mitchell | January 23, 2013 AAA

According to Finviz, over the last week and month the conglomerate sector has been the leader. The sector as a whole is up 10% in the last three months. Stocks such as United Technologies (NYSE:UTX) and 3M (NYSE:MMM) have ramped up more than 20% gains since the summer, and Caterpillar (NYSE:CAT) and Leucadia National (NYSE:LUK) have seen similar gains since November. With these heavily traded stocks (all trades well over a million in daily average volume) already posting solid gains, is now the time to buy?

The uptrend within United Technologies has been looking very strong since setting an intermediate low in November at $74.44. The near vertical rally since June has broken a long-term triangle pattern, which started back in August 2011. Ultimately the breakout indicates a continued long-term rise in the stock; the target is $99 to $106. The wide range is given because $100 is such an important psychological level - if the stock lacks momentum as it approaches, it isn't likely to get through. But if it moves through $100, another several dollars of movement higher is probable. While the target provides for further upside, triangle breakouts often retest their breakout point. Therefore, I would look to pick up the stock in the $84 to $80 range, with a stop just below $74. That provides for about $20 in upside for $6 to $8 risk. If you already own it, I like the looks of it, but would tack the same $74 stop on it.

SEE: The Anatomy Of Trading Breakouts

UTX triangle

3M is rapidly approaching the $100 mark, and has a strong momentum going in. In the spring and summer of 2011, the stock made attempts at the mark but faltered near $98 - a level easily surpassed this time round. My main problem is that I don't see a technical catalyst to really keep driving the stock higher. While passing through $100 could spark some additional short-term buying interest into $105, I don't seem much of an upside beyond that. While I may end up eating my words, because currently the stock is quite hot, at current levels near $99 the reward to risk just doesn't seem to be there right now.

MMM breakout

Caterpillar is in an interesting spot technically. In mid-November the stock traded down to near $80. As of the January 22 close it was at $97.72 - a solid three-month performance. Zooming out, over the last two years the stock has been moving in large swings, and while it's not quite a range, it has been range like. The current price is right in the middle of that "range" and there isn't likely to be much resistance until the stock nears $110. That said, the aggressive move higher since November makes stop placement tricky. January started with a gap higher, and that should provide some support. Therefore, picking Caterpillar up at near $97 with a stop near $92 allows for a moderate risk/reward ratio. Over the last two years there has been a bullish bias, which means it is quite possible the stock tests the 52-week high at $116.95, and potentially beyond. It is too early to predict that, but even with a $110 price target there is a tradable move given the right entry and stop level.

SEE: Interpreting Support And Resistance Zones

CAT swing

Over the last two years Leucadia National has been beaten down - dropping from $39.14 in April 2011 to near $20 multiple times since. The $19.58 low in June 2012 looks like it may be a turning point for the stock though. A choppy rise into the $24 region gives bulls some technical hope. If the stock rises above $25, I like it. Waiting for the move above $25 shows the stock has some upward momentum, and a stop can still be placed relatively close at $23. The upside is the question here though. With the main trend down, there are loads of resistances everywhere. If the stock breaks $25, a target of $27 is a solid initial target. Between $27 and $30, there are significant price peaks from 2011 and 2012. If the price climbs through this area, it is a good sign long term that the trend has turned. Given the longer term downtrend, if the stock doesn't break $25 and then drops below $23, there is a definite short trade possibility there.

SEE: Support & Resistance Basics

LUK range

The Bottom Line
Conglomerate stocks are performing very well overall, but how they will perform in the future is the primary concern. As with any trade, there has to be a reasonable potential profit to warrant the risk of a trade. While I like investing in the strongest sector, not all stocks in this (or any) sector are on equal footing. It's better to be patient and wait for a trade setup that fits your risk tolerance, even when a stock is strong.

Charts courtesy of stockcharts.com

At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.

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