SAP SE (NYSE: SAP), Wheaton Precious Metals Corp. (NYSE: WPM), and Churchill Downs Inc. (NASDAQ: CHDN) are three stocks from widely disparate industries that have one big thing in common: They are all near breakout points from recent pullbacks.
A base breakout happens after a stock has been in some price consolidation, perhaps a deep pullback or just a shallow, sideways trend, or something in between. The consolidation can take weeks, months, or over a year.
In 2022, we saw numerous stocks form long areas of consolidation. If the correction began about 18 months ago or more, any new base following a small run-up can be counted as a fresh pullback. In other words, you don’t have to wait for the stock to rally past its all-time high for a fresh base to kick off a new rally potentially.
A breakout from a price consolidation can signal that it’s time for a fresh price run-up to begin
German enterprise software giant SAP is a perfect example of a stock that’s well off all-time highs, yet is forging a potentially constructive base.
The company has struggled to gain much share price traction since October 2020, but has posted a gain of 13.15% in the past three months and 15.53% year-to-date.
A glimpse at its chart shows a choppy uptrend that began in September, as the stock started to rally from its lowest levels since 2016.
The current consolidation began on February 3. The stock has been along its 50-day average, a good sign, indicating that institutional investors are essentially holding shares, rather than selling off in volume.
The buy point of the current consolidation is above $123.28, its high on February 2. Shares closed at $121.38 on March 20, within striking distance of that buy point.
SAP is migrating all its corporate clients to the cloud, so it may be a little late to make a move that many younger, smaller more nimble companies didn’t have to make because they were always cloud-based. Analysts expect SAP to see an earnings decline in 2023, with growth resuming in 2024.
All that is to say: While the technicals show reason to be optimistic, and the stock may indeed post a solid rally after breaking out, be aware of potential pitfalls.
Wheaton Precious Metals
Wheaton has returned 8.99% in the past month and 15.17% in the past three months. The stock cleared a buy point above $46.53 on March 20, but pulled back in the session, still finishing with a gain.
The Canadian company is the streaming business, meaning it provides upfront financing to silver and gold miners in exchange for the right to purchase a portion of the precious metals at a discounted price, which it can turn around and sell.
Wheaton helps these mining companies develop new mines, expand existing operations, and reduce their debt by providing upfront capital.
Wheaton’s sales and earnings declined in 2022, but Wall Street expects that trend to reverse this year, with earnings growing 4% to $1.16 a share. That’s seen grow by another 15% in 2024.
Overall, analysts see gold and silver prices rising this year, in tandem with a weaker U.S. dollar and the Federal Reserve potentially easing monetary policy.
A less hawkish Fed policy would probably result in continued dollar weakness, which could result in precious metals fetching higher prices.
Wheaton’s chart illustrates a rally that began in September, with the stock rallying to a January high of $46.53, which marked its most recent buy point.
The stock is currently in buy range, but if you choose to make a purchase, don’t chase it more than 5% beyond its buy point, because you may get shaken out in a normal post-rally pullback.
Yes, the big day of mint juleps, seersucker suits, and eye-catching hats is less than two months away. But Churchill Downs has plenty of other revenue sources other than hosting the Kentucky Derby every May.
The company is home to other races, so wagering, ticket sales, and food and beverage sales are obvious ongoing sources of revenue. But the company also operates an online betting platform, allowing people to make wagers from their phones. It simulcasts races to other tracks nationwide and makes its space available for corporate events and sponsorships.
The stock has been forming a shallow consolidation recent weeks, as you can see on its chart, particularly using a weekly view with bars or candlesticks.
A shallow consolidation means the stock is not in a race to move either higher or lower; this type of chart formation can bode well for a stock because it’s often a sign that institutions are biding their time ahead of the next starting gun.
The current buy point for Churchill Downs is above $253.29. The stock closed March 20 at $250.60, close to overtaking that buy point.
While earnings in the most recent quarter fell below estimates, analysts’ forecasts remain upbeat. Wall Street expects earnings growth of 35% this year, and 32% next year. Those are the kind of numbers that the leading growth stocks routinely post.
MarketBeat data show a “moderate buy” rating on the stock, with a price target of $273.67, a potential upside of 9.20%.