Another Rifle Shot at a Small and Steady Small-Cap Play

U.S. stock markets ended the week broadly flat, with Dow Jones down 0.37%, the S&P 500 unchanged and the NASDAQ up 0.18%. The MCSI Emerging Markets Index rose 2.42%.

Big gainers in your Bull Market Alert portfolio included Avista Corporation (AVA), which added 4.30%; Sociedad Química y Minera de Chile S.A. (SQM), which moved up 3.36%; Healthcare Services Group, Inc. (HCSG), which rose 2.66%; and the iShares MSCI Emerging Markets (EEM), which gained 2.42%.

The iShares MSCI Emerging Markets (EEM) also moved back above its 50-day moving average to a Buy.

Healthcare Services Group, Inc. (HCSG) also hit a new 52-week high.

With the U.S. stock market stuck in a trading range, the Fed likely to hike rates and weak seasonality, this is a stock picker’s market.

That means we have to continue to take a rifle-shot approach to picking some below-the-radar, small-cap stocks that have the best chance of outperforming the market.

This week’s Bull Market Alert recommendation is Duluth, Minnesota-based utility company Allete, Inc. (ALE). Allete owns and maintains electric transmission assets in Wisconsin, Michigan, Minnesota and Illinois. It also provides regulated electric, natural gas and water services in northwestern Wisconsin to approximately 15,000 customers, as well as regulated utility electric service in northeastern Minnesota to approximately 145,000 retail customers.

Allete first started generating energy from alternative sources like renewable hydropower back at its founding 110 years ago. That ethos of renewable and sustainable energy is built into the DNA of the company. Today, Allete is ranked 16th in the nation in wind power capacity and is playing a key role in meeting a plan to shift Minnesota’s energy mix to one-third renewable, one-third gas and one-third coal in the coming years.

Allete also does well while doing good. Allete Inc. recently reported a first-quarter profit of $45.9 million on revenues of $333.8 million. That equaled net income of 93 cents per share, topping Wall Street expectations of 91 cents per share. Over the course of 2015, Allete earned $2.92 per share, with operating revenue soaring by 31% to $1.49 billion. It is a steady grower that should do well in a choppy, range-bound market.

Allete is hardly a household name among investors. Nevertheless, it has caught the attention of many small-cap stock specialists, and is a holding in 11 value and dividend oriented, small-cap strategies I track.

So buy Allete, Inc. (ALE) at market today and place your stop at $53.50. I am holding off on recommending any options in Allete at this time.

Portfolio Update

iShares MSCI Emerging Markets (EEM) moved 2.42% higher last week. From a technical perspective, EEM has made some very promising moves just recently. Now above the mighty 200-day moving average (MA), it will likely hold this line. EEM also moved above the 50-day MA last Friday. This points to gains in this emerging markets bellwether fund. EEM is now a BUY.

The TJX Companies, Inc. (TJX) closed the Memorial Day holiday week nearly flat. TJX has been on a slow, steady climb since reporting earnings back on May 17. Many analysts’ firms have positive ratings on TJX. MKM Partners, UBS, Stifel Nicolaus and Citigroup all have recently reiterated their “Buy” ratings, with RBC Capital and the Sanford C. Bernstein company both giving it an “Outperform” rating. The price targets range between $83 and $88, suggesting continued steady upside for the stock. TJX was a HOLD as of yesterday, but it is just under the 50-day MA and primed to move above at any time.

Sociedad Química y Minera de Chile S.A. (SQM) had a strong week, moving up 3.36%. SQM recently announced a 50% capacity increase in its potassium nitrate mining operations. This brings the new output total to approximately 1.5 million metric tons per year. SQM is a BUY.

Healthcare Services Group, Inc. (HCSG) rose 2.66%. After bottoming directly on the 50-day MA three weeks ago, HCSG has been on a nearly unbroken run higher ever since. HCSG also made another new 52-week high last Friday. HCSG remains a BUY.

Avista Corporation (AVA) popped late last week, adding 4.30%. After trading sideways for the past few weeks, AVA closed Friday just short of hitting a new 52-week high. Zacks Investment Research bumped its rating on AVA from “Hold” to “Buy” last Friday. Zacks has a $47.00 price target set, suggesting a potential 12.74% move higher from the stock’s previous close. AVA is a BUY.

Dycom Industries, Inc. (DY) gained 0.52%. Dycom will purchase telecom interests from Goodman Networks Inc. at the end of June. Dycom will end up paying around $107.5 million for assets that are projected to generate about $150 million to $165 million in revenue over the next year. DY is a BUY.

Sincerely,

Nicholas A. Vardy