3 Blue-Chip Stocks That Could Be Flashing 'Buy'

Dow stocks Caterpillar Inc. (NYSE:CAT), Microsoft Corporation (NASDAQ:MSFT), and Walt Disney Co (NYSE:DIS) could be flashing "buy" signals, if past is prologue

Mar 6, 2017 at 2:09 PM
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The shares of Caterpillar Inc. (NYSE:CAT) took a hit last week, as traders received word of a federal raid at the blue chip's Illinois headquarters. However, CAT -- along with fellow Dow stocks Microsoft Corporation (NASDAQ:MSFT) and Walt Disney Co (NYSE:DIS) -- just sent up a "buy" signal, if past is prologue. Below, we'll discuss why now could be an opportune time to jump in on CAT, MSFT, and DIS shares.

CAT Stock Could Top Triple Digits 

CAT dragged down the Dow last week, due to the aforementioned Fed raid. However, the stock has been in a channel of higher lows and highs since early 2016, and is now testing its 80-day moving average. One month after CAT's last five tests of this trendline, it was higher 75% of the time, averaging a healthy gain of 4.59%, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

caterpillar CAT stock chart

Should history prevail, another 4.59% rally would place CAT -- last seen at $95.29 -- right around the $100 century mark, in territory not charted since late 2014. And if bears get spooked, a short squeeze could send CAT even higher. At the stock's average daily trading volume, it would take more than six sessions to repurchase all the shorted CAT shares. 

Analysts are also skeptical of CAT, despite the equity's long-term uptrend. In fact, just five brokerage firms offer up "buy" or better ratings, compared to 11 "hold" or "strong sell" opinions. A round of upgrades could also propel CAT higher.

Not to be outdone, options traders have also upped the bearish ante on CAT lately. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day put/call volume ratio of 2.76, indicating nearly three puts bought to open for every call during the past two weeks. What's more, this ratio ranks in the 84th percentile of its annual range, suggesting speculators have initiated bearish bets over bullish at a much faster-than-usual clip during the past two weeks. An unwinding of pessimism in the options pits could bode well for CAT shares.

Plus, Caterpillar Inc. (NYSE:CAT) sports a Schaeffer's Volatility Scorecard (SVS) of 74, indicating the stock has tended to exceed options traders' volatility expectations over the past year. And its Schaeffer's Volatility Index (SVI) of 21% is in just the 7th percentile of its annual range, pointing to historically low short-term premiums. In other words, now is an opportune time to roll the dice with CAT options.

MSFT Stock Takes a Breather After Record Highs

MSFT has also been in a long-term uptrend, adding 34% since its post-Brexit lows to trade at $64.41. The stock notched an all-time peak of $65.91 in late January, but has since taken a breather to test its 40-day moving average. According to White, the last seven tests of this trendline have resulted in an average one-month gain of 1.79%, with MSFT higher 71% of the time.

microsoft msft stock chart

Unlike CAT, though, traders should note that MSFT is already pretty beloved on Wall Street. Just six out of 26 analysts offer up "hold" or worse recommendations, and not even 1% of MSFT's float is dedicated to short interest. Plus, the tech stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 2.66 is higher than three-quarters of all other readings from the past year, suggesting a healthier-than-usual appetite for Microsoft long calls over puts of late.

Still, those wishing to bet on MSFT's short-term trajectory can do so at a relative bargain. Microsoft Corporation (NASDAQ:MSFT) sports an SVI of just 12% -- an annual low, suggesting the options market is pricing in historically low volatility expectations at the moment.

DIS Stock Hovers Atop 40-Day

DIS was sitting in annual-high territory just over a month ago, peaking at $111.90 on Feb. 1. The shares have since consolidated north of their own 40-day moving average -- previous tests of which have marked short-term buying opportunities. Specifically, DIS shares have been higher 70% of the time one month after their last 11 tests of the 40-day, averaging a gain of 1.72%, per White. At last check, DIS stood at $110.65 -- a gain of nearly 23% since its October lows.

walt disney dis stock chart

As with MSFT, DIS options traders have been buying to open calls over puts at a rapid-fire rate; the stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 2.61 is in the 92nd percentile of its annual range. Echoing that, its Schaeffer's put/call open interest ratio (SOIR) of 0.53 indicates that near-term calls nearly double puts, and ranks just 8 percentage points from an annual low. Short interest isn't much to write home about, either, with not even 1% of DIS' float sold short.

However, nine out of 21 analysts maintain "hold" or worse opinions of DIS, in spite of its longer-term ascent. A flood of upbeat analyst attention -- perhaps after Walt Disney Co's (NYSE:DIS) annual shareholder meeting on Wednesday, March 8 -- could spark more upside for the shares. 

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