Could These 3 Stocks Be Under-the-Radar Gems?

Is it time to jump in on underloved Caterpillar Inc. (NYSE:CAT), 3D Systems Corporation (NYSE:DDD), and Stanley Black & Decker, Inc. (NYSE:SWK)?

by Andrea Kramer

Published on Mar 24, 2016 at 10:47 AM

Our internal sector scorecard measures price action and sentiment across several industries, in an effort to find uptrending stocks still surrounded by skepticism. By smoking out these Expectational Analysis gems, we can spot potential bullish trading opportunities -- and get in before the crowd. Against this backdrop, one sector emerged as the new cream of the crop: Machinery/Tools. As such, we're going to take a look at three stocks in the industry: blue-chip construction stock Caterpillar Inc. (NYSE:CAT), 3-D printer maker 3D Systems Corporation (NYSE:DDD), and power tools provider Stanley Black & Decker, Inc. (NYSE:SWK).

Of the 16 stocks under our Machinery/Tools umbrella, not one is trading beneath its 80-day moving average, according to Schaeffer's Senior Quantitative Analyst Rocky White. Furthermore, the average year-to-date gain is 19.3% -- behind only Precious Metals and Steel/Iron. However, as a whole, just 27% of analysts offer up "buy" or better ratings, near-term option traders are overwhelmingly put-heavy, and short interest remains elevated -- pointing to plenty of lingering pessimism left to unwind and drive further gains.

CAT, in fact, boasts not one "buy" rating, compared to 26% "buys" a year ago. In the same vein, short interest has surged 40% in the past year, and now represents 7.4 days' worth of pent-up buying demand, at CAT's average pace of trading.

Further, the stock's Schaeffer's put/call open interest ratio (SOIR) of 2.12 indicates that puts more than double calls among options expiring within three months. Plus, this ratio registers in the 75th percentile of its annual range, pointing to a healthier-than-usual appetite for near-term puts over calls. Echoing that, the equity's 50-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 2.97 -- higher than 92% of all other readings from the past year.

All this skepticism for a stock that's outperformed the S&P 500 Index (SPX) by nearly 17 percentage points during the past two months, and boasts a year-to-date gain of 10.1%, compared to the Dow Jones Industrial Average (DJIA), which is struggling to break even for 2016. Should Caterpillar Inc. (NYSE:CAT) continue to outshine, a reversal in sentiment could propel the shares higher.

Moving on, DDD has been the brightest star in our Machinery/Tools class so far this year, up roughly 62% year-to-date. What's more, the stock has outperformed the SPX by a whopping 74 percentage points during the past 40 sessions, and sports a March gain of 31%, thanks to a stellar earnings showing.

Still, DDD has very few fans on Wall Street. Just one out of 15 analysts offers up a "buy" endorsement, and short interest accounts for 26.7% of DDD's total available float. At the equity's average daily trading volume, it would take nearly two weeks to repurchase these pessimistic positions. Meanwhile, the security's SOIR of 1.91 is higher than 99% of all other readings from the past 12 months, pointing to a bigger-than-usual put-bias among near-term traders.

SWK sports a similar sentiment backdrop, despite leading the Machinery/Tools pack for year-over-year returns. The shares have advanced 7.3% in the past 52 weeks, and recently reclaimed a foothold atop their 32-week moving average for the first time since early January. This trendline ushered SWKS higher from mid-2014 well into 2015.

Short interest on SWK grew a whopping 67.6% during the past two reporting periods, suggesting traders are expecting a serious pullback. It would take about a week to buy back all of these bearish bets, at SWK's average pace of trading. Likewise, 10 out of 16 analysts remain wary, doling out tepid "hold" ratings.

The analyst crowd isn't much more optimistic. SWK has racked up a 10-day ISE/CBOE/PHLX put/call volume ratio of 2.56 -- higher than 74% of all other readings from the past year. In other words, option buyers have picked up SWK puts over calls at a faster-than-usual pace during the past two weeks.

Should 3D Systems Corporation (NYSE:DDD) or Stanley Black & Decker, Inc. (NYSE:SWK) continue their assault on the charts, an unwinding of skepticism could add fuel to the equityies' fire. Specifically, a flood of upgrades, a short squeeze, or a mass exodus of option bears could translate into added upside for DDD and SWK.

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