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Keith Richards.
Keith Richards.

BNN MARKET CALL

Three top stock picks from ValueTrend’s Keith Richards Add to ...

Keith Richards is Portfolio Manager at ValueTrend Wealth Management of Worldsource Securities. His focus is technical analysis.

Top Picks:

iShares S&P/TSX SmallCap Index Fund

A repeat from my last two BNN Market Call shows. We bought November 1, at $14.94. This ETF is a basket of Canadian small caps. We like it because it broke a downtrend late last year, consolidated, and broke out from the consolidation. This is my “signature” technical style of buying (base breakouts). Small caps can be strong for the first 3 months of the year, seasonally speaking. And this year in particular, this is where you are finding value over many of the arguably overvalued larger capped stocks.

Microsoft Corp.

Perhaps some of you have heard of this extremely small-capped relatively unknown stock (ha-ha). We bought in December at under $36. Microsoft is one of the few large-caps that the market has overlooked. It’s been in a sideways consolidation since 1999 – and it’s just now breaking out the lid of around $35 – the greater the base, be better the case as is said. Again, my “signature” way of buying stocks is in looking for such big consolidations, and buying the breakouts. The company reported earnings last week confirming they are not a one trick pony any more. The earnings surprised were in areas like “devise and consumer hardware”, where the recent Xbox One release was well-received by the marketplace. The company is a technology monster that continues to innovate. Several catalysts remain for this stock, including the inevitable hiring of a new CEO. We expect the company to experience continued growth, with strong contributions from online services, Microsoft Business, and Entertainment & Devices Divisions. With the positive catalysts for 2014, it is just a matter of time before the market recognizes these developments. This will likely be one of our longer-termed holds.

CGI Group Inc.

There has been plenty of noise surrounding this name lately. We just started legging in – bought a small piece at $37 a couple of weeks ago. We will buy more as the price firms up assuming it can hold about $33-$34 (200-day MA). The media has been reporting details of hedge fund short sellers and the loss of the mighty Obamacare U.S. government contract. CGI generates revenues of over $10-billion dollars a year. The truth is, CGI serves customers around the world as an IT services contractor. The Obamacare contract represented less than 1-per-cent of that revenue, suggesting that the media is creating the proverbial mountain out of a molehill. CGI's growth prospects are significant, including the recent Logica acquisition. This acquisition will give them much greater access to European markets, and further diversification out of the Canadian dollar which will further benefit CGI's earnings. The stock is in an uptrend, and has held its 200-day MA at around $34 despite the recent selloff. A minor temporary break of that MA would be okay. All in, the technical trend and the fundamental profile of CGI indicates an attractive growth story. We’re looking to leg in, having bought a half-position to start.

Past Picks: December 18, 2013

Qualcomm Inc.

Still own it – good overall play in the technology space. May sell it in a month or so. Technology strong season is now ending, but we watch the technical side first, so will sell it if the stock starts to underperform. Good for now to hold.

Then: $73.18; Now: $71.99; Total return: -1.63 per cent

Brookfield Infrastructure Partners

Still own it, have owned it for 2 years which is an eternity for us. As noted in my last show in December, it bounced off of a trendline, it was another good entry point in a long-term uptrend.

Then: $39.46; Now: $41; Total return: +3.90 per cent

iShares S&P/ TSX SmallCap Index Fund

Still own it, bought in November at $14.90. Still like it.

Then: $15.07; Now: $15.68; Total return: +4.40 per cent

Total return average: +2.22 per cent

Market outlook:

Followers of Dow Theory may have noted the divergence between the Dow Industrials and the Dow Transports (transports were going up while the industrials sold off in early January). This may have been one of the warning signs of the current correction. To be honest, I didn't expect a correction to happen for another week or two, but the signs were there for a correction to happen sooner rather than later. I blogged last week suggesting the potential for a February correction. I was a week or so late in my timing - but my main point was to brace for an inevitable pullback.

I've drawn a regression channel using the StockCharts Raff Regression tool on the S&P 500 chart below (solid blue lines). Simple analysis suggests that 1775, which we hit on Monday, is the first significant support level. This level lines up with an orderly selloff (approx. 45 degree angle) to the bottom of the nearer-termed channel noted by the pink lines on my chart. A more aggressive selloff might bring the S&P back to 1725 – see the dashed green line on the chart. That would likely line up with the bottom of the regression channel.

Either way, I'd expect that this correction may be short-lived. We sold a little equity in the ValueTrend-managed equity platform a week ago in anticipation of this mini-selloff, and we hope to deploy that cash into 1-2 new positions as this correction plays itself out. As an investor, it’s always good to take advantage of interim corrections within a primary uptrend, so use this selloff to buy high quality stocks that may have been on your watch list!

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