Most of the time, I am leery of mega-cap industrial stocks when it comes to trading. There are several reasons for this, but the two main ones are:
1. The large number of shares outstanding usually translates into the stock being a slow mover; and
2. These stocks are so widely followed and widely held, any news that could really move the needle is usually already baked into the price.
This year, however, mega-cap stocks have been behaving more like fast-moving techs, as some of the biggest industrial giants in the world are actually breaking out to new highs on heavy volume. So far in 2013, the Industrials Select Sector SPDR (XLI) is up almost 20%.
This kind of trading performance in large-cap industrials is extremely impressive. It's also a sign of the times. Traders continue betting on the sector despite annual U.S. GDP growth that's below 2%, and despite slowing growth in places such as China and the European Union, two areas that tend to consume a lot of industrial goods.
As traders, it's our job to identify stocks with the greatest potential upside, and the more factors in our favor, the better.
First, we want to own stocks in a booming sector, and as you've seen, industrials are indeed a booming sector. Next, we want to own stocks with strong fundamentals, and of course, stocks with strong technicals. On the latter front, I prefer stocks breaking out to new highs on heavy volume, as that provides the momentum tailwinds that can make you big money.
All three of these attributes can be found in one of the biggest, most well-known blue-chip companies around: General Electric (GE).
On Friday, July 19, GE reported a profit of $3.13 billion, or $0.30 a share, in the second quarter, compared with $3.11 billion, or $0.29 a share, in the same quarter a year ago. Although the company beat on the bottom line, its revenue actually fell 3.5% from the prior year quarter to $35.12 billion. This was slightly below the $35.56 billion analysts were anticipating.
The key metric in this blue chip's numbers that I, and most traders I know, were watching closely was the industrial division's profit margin. It increased 0.5% in Q2, a welcome turnaround from a slide in the measure in Q1. Growth in this segment is important as GE transitions from a company with profits driven by finance from the GE Capital division to one driven by industrial growth.
The earnings report caused the stock to spike over 5% in Friday's trade, hitting a new 52-week high. While GE now trades near multi-year highs, it's by no means overextended in relation to its 50-day moving average. In fact, shares are only about 5% above that mark.
I suspect that the migration of capital to mega-cap industrials is going to continue for the remainder of 2013, and that means the upside will likely continue for blue-chip stalwarts in the space such as GE. That also means that getting in now, while the momentum is on your side, is a great entry place for the fast-money trade.
Recommended Trade Setup:
-- Buy GE at the market price
-- Set initial stop-loss at $22.70, approximately 8% below the current price
-- Set initial price target at $28.37 for a potential 15% gain by year-end