Is this pullback a buying opportunity?

The S&P/TSX composite index has rallied 3 per cent month-to-date. As a result, stock prices are percolating and the number of stocks technically breaking out is steadily rising. If history repeats itself, the list of stocks breaking out to the upside could continue to grow.

Looking over the past 15 years, the months of November and December have historically been solid months for stocks. During the month of November, the S&P/TSX composite has increased nine times in the past 15 years, delivering a price return, on average, of 0.6 per cent. During the month of December, the index has fared even better, increasing 12 times in the past 15 years, and gaining 1.5 per cent, on average.

I screened for stocks in the S&P/TSX composite as well as the S&P/TSX small-cap index, that were technically breaking out to the upside or to the downside; I used new 40-day highs and lows as my criteria for the screen. The accompanying list highlights these companies.

As you can see from the list (below), many of these companies with positive price momentum are defensive investments in sectors such as telecommunications and financials, as well as the infrastructure segment. Many of these securities offer investors attractive yields. Largely absent from the list are resource stocks, which are neither on the positive nor negative breakout list, suggesting that many resource stocks are consolidating and perhaps showing some stabilization. Stocks with negative downside momentum are largely isolated to specific stocks, rather than sectors.

The company

Given the importance of managing downside risk, I chose to highlight Progressive Waste Solutions. The waste-management company has consistently outperformed the overall market over the past several years, and a stock that I recommended investors consider adding to their portfolios last month. The stock declined 17 per cent on Oct. 20 after management "preannounced" weak third-quarter results and lowered guidance for 2015. (They were slated to report on Oct. 30.)

So what went wrong, and is this pullback a buying opportunity?

Negative preannouncement: Management at Progressive Waste Solutions maintained revenue guidance for 2015 but reduced its adjusted EBITDA guidance to between $480-million (U.S.) and $485-million, below previous guidance of between $500-million and $515-million, stemming from higher operating costs from its U.S. West region (Texas, Louisiana, Oklahoma, Arkansas, Mississippi, Missouri and Illinois) as well as a "more cautious view of waste volumes in parts of our Western Canada operations in the fourth quarter."

Management has said it has taken steps to improve operational results, including changes to personnel, truck maintenance, dealing with labour issues and other actions. Management anticipates its operational issues will largely be resolved over the next six to nine months.

Dividend policy: Management says it remains committed to returning capital to shareholders and pays a quarterly dividend of 17 cents (Canadian) a share, equating to an annualized dividend yield of 2.3 per cent. In addition, management remains committed to its share buyback program.

Valuation

The stock is trading at an enterprise value-to-earnings before interest, taxes, depreciation and amortization multiple of 7.6 times the 2016 consensus estimate, relatively close to its three- and five-year historical averages.

Analysts' recommendations

Many analysts have downgraded their recommendations. According to Bloomberg, there are eight buy recommendations, eight hold recommendations and one sell recommendation. This compares with 14 buy recommendations, two holds and one sell at the beginning of September.

Bottom line

This stock is in the penalty box and will likely be a "show-me" story, meaning investors will want to see operational improvements before accumulating shares, and the stock price is likely to remain sub-$30 in the near term, unless there is a catalyst such as being awarded the City of New York Department of Sanitation contract, which the company is hoping to win.

For longer-term investors, this is a solid company with strong industry fundamentals.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com