A New Utility Play Emerges with another Options Recommendation

It was a mildly positive week for stocks across the board, with the Dow Jones up 0.29%, the S&P 500 rising 0.61% and the NASDAQ gaining 1.40%. The MCSI Emerging Markets Index also ended the week 0.78% higher.

Big gainers in your Bull Market Alert portfolio included The TJX Companies, Inc. (TJX), which rose 2.60%, and Spire, Inc. (SR), which gained 2.47%.

Dycom Industries, Inc. (DY) also hit a new 52-week high.

This week’s Bull Market Alert recommendation, NorthWestern Corporation (NWE), is yet another utility stock that has attracted the attention of many leading small-cap investment strategies.

Founded in 1923 and based in Sioux Falls, South Dakota, NorthWestern provides electricity and natural gas to over 700,000 residential, commercial and industrial customers in Montana, South Dakota and Nebraska.

Here’s why I expect this regional utility to continue its recent bull run.

First, utilities are the top-performing sector in the U.S. stock market so far in 2016. In fact, among the seven sectors that are expected to be in the black this quarter, utilities boasts the highest earnings growth. Even as S&P 500 earnings are expected to decline 5.4% on 0.5% lower revenues, the utilities sector is expected to grow Q2 earnings by 20.6%, boosted by a 2.4% top-line improvement. No wonder the Dow Jones Utility Average (DJU) is up 23.1% year to date compared with the S&P 500 return of 6% over the same period.

Second, NorthWestern’s own financial performance confirms this bullish trend. On Friday, July 22, NorthWestern announced second-quarter earnings of 73 cents per share, crushing Wall Street’s expectations of 56 cents per share. Outperforming estimates by an impressive 30% is no small feat.

Third, from a purely technical standpoint, NorthWestern’s stock is sharply oversold. The stock only bounced off of its recent lows after Friday’s surprisingly positive earnings announcement. This makes for a very good time to enter the stock.

Finally, NorthWestern is also held by 11 small-cap, mostly value-focused investment strategies that I track, making it one of the most popular holdings in the small-cap universe.

So buy NorthWestern Corporation (NWE) at market today, and place your initial stop at a wide $55.00.

I am not recommending any options on NWE as the bid-ask spreads are too high.

However, with utility stocks rallying, I am recommending that, based on your existing position in this stock, you buy Spire Inc. (SR) September $70 call options (SR160916C00070000), which last traded at $1.35 and expire on Sept. 16.

Portfolio Update

Healthcare Services Group, Inc. (HCSG) settled down after a one penny earnings miss sent the stock tumbling last week. Analysts’ mean one-year price target is $42.67, based upon a spread of estimates ranging from $40 to $47. Trading below its 50-day moving average, HCSG is a HOLD.

Avista Corporation (AVA) added 1.70% last week. Avista will report earnings next week on Aug. 3, before markets open. Analysts’ estimates for AVA reflect a consensus earnings per share (EPS) of $0.43. Investors could be looking for an earnings surprise as short interest in Avista is down 3.1% from an early July report. Should AVA beat earnings estimates and push short-sellers to close their positions, AVA’s average daily volume of 417,700 shares means it could take five days to cover shares, providing an additional week of upside boost. AVA is a BUY.

Allete, Inc. (ALE) moved 1.57% higher. ALE will also report earnings on Aug. 3, before markets open. ALE is well-above its 50-day moving average (MA) and is a BUY.

Drew Industries Incorporated (DW) gained 0.91%. DW will announce earnings on Aug. 4, before markets open. In an even more optimistic outlook, DW’s short interest tumbled by 8.68%. A post-earnings pop could add significantly to DW’s already whopping 50% gain for 2016. DW is a BUY.

Spire, Inc. (SR) closed each day higher last week, ending the week up by 2.47%. SR will also report earnings on Aug. 3, before markets open. Five analysts are positive on SR and set a “Buy” rating for the stock, while three rate it a “Hold” and just one a “Sell.” SR is a BUY in your Bull Market Alert portfolio. Note the new option recommendation on this stock above.

B&G Foods Inc. (BGS) closed out the week nearly perfectly flat, dipping just 0.02%. BGS will report earnings on Thursday after markets close. Analysts’ consensus estimates call for EPS of $0.46 on revenue of $316.56 million. I highlighted B&G’s acquisition of Green Giant in my recent recommendation, and the benefit that BGS’ stock price should be seen once again in its next earnings report. BGS is thought to be reporting earnings growth of roughly 36% for this upcoming quarter. BGS is above the 50-day MA and is a BUY.

Sincerely,

Nicholas A. Vardy