3 Titanium Stocks = 3 Weak Charts

One area of the market that has seen a lot of pop in recent years is speciality metals. One subsector in particular has caught my eye; titanium. However, I am not the first to catch this trend, and stocks in this sector have seen enormous runs the past few years. But with their specialization in aerospace, chemical, oil related areas - they should continue their long term out performance. But are they buys right now? I'd argue no, based on their technical charts. Let me explain why below.

The 3 stocks that investors are latching onto as titanium plays (in order of size) are: Allegheny Technologies (ATI), Titanium Metals (TIE), RTI International Metals (RTI).

Fundamentally all look pretty sound.
Allegheny Technologies (ATI) trades around $95, with earnings estimates of $7.97 for 2007 and $8.74 in 2008, generating forward PE ratios of 11.9 and 10.8; however earnings estimate growth for next year is only 9.7%, with longer term growth estimates of 14%+. ATI has revenue of about $6 billion a year.

Titanium Metals (TIE) trades around $30.25, with earnings estimates of $1.61 for 2007 and $2.03 in 2008, generating forward PE ratios of 18.8 and 14.9; with earnings estimate growth for next year of 26%, with longer term growth estimates of 25%. TIE has revenue of about $1.5 billion a year.

RTI International Metals (RTI) trades around $66.50, with earnings estimates of $4.09 for 2007 and $5.26 for 2008, generating forward PE ratios of 16.3 and 12.7; with earnings estimate growth for next year of 29%, with longer term growth estimates of 22%. RTI has revenue of about $600 million a year.

Pretty impressive on first glance. However, the stocks have been quite weak of late, with RTI International Metals leading the downturn, with a severe downturn from them $100 level in late April to the mid $60s now, following a series of bad news events, the most recent of which was a downward revision of full year profit in late July due to an investigation by US Customs (which could potentially impact earnings if an adverse decision is made), along with a reduction in selling price into the Joint Strike Fighter program with Lockheed Martin (LMT). So while I mentioned the $4.09/$5.26 estimates for 2007/2008, these are actually materially lower than the $4.40/$5.75 estimates for the same time frames that analysts had for the stock 3 months ago. While Allegheny Technologies and Titanium Metals have not seen any revisions of the type, their stocks have falledn RTI downward over the ensuing months.

So here is a case where one can like the fundamental picture in the long run, but the charts (even for the most basic of technical analysis) are staying it's not time to get in yet. RTI has lost about 1/3rd of its value in the past 4 months. Looking at the chart, it broke below its 50 day moving average in early May, then broke below its even more important 200 day moving average (at the time just north of $75) in late July, and in mid August its chart formed the death cross, a bearish indicator where a short term moving average drops below a long term (in this case the 50 day moving average dropped below the 200 day). The stock has shown very little signs of life of late, not even bothering to retest a move back to the 50 day moving average, and stalling out intraday at $74 level on its best days. Until the profit picture becomes a bit clearer (i.e. stable), and the chart improves, this stock is best left alone. The stock is right around lows of the year, and the next truly solid base is the $40 level, which the stock hung around in July - October 2006. Could the stock get that low? I don't know, but I don't want to be bottom picking to find out. So a buy for this name would be better served either near that $40 level or a reversal in the chart, and a strong price move back above the 50 and 200 day moving averages - 50 day is currently @ $74, and 200 day @ $78.50. Nothing at this time technically indicates a reversal of this time was in the offering and in fact and moves upward would probably be best served to short the stock (although I cannot short individual names in this fund)

Titanium Metals has a similar chart pattern, although not quite as severe as RTI. After breaking down below its 50 day moving average in late May the stock has slithered around that level with intermediate breaks down below the 200 day moving average (but recovering), for most of June/July. However in early August, after the stock closed below the 200 day moving average, the stock has never truly recovered and has been stuck below this important level for the past month. Much like RTI, a death cross appeared in late August, signaling a bearish chart. Again, much like RTI, a trader would be shorting this stock on any moves up to the 200 day moving average. Looking at a longer term chart, there seems to be a low of support in the $28 level, so the price seems a bit boxed in here now. A break of $28 would bode quite ill for the stock near term.

Last, Allegheny Technologies (ATI) which is the only name of the 3 I hold in the fund; however I am down to a tiny holding position of 0.2% of the fund, pending a better chart. When I started the fund in early August, this was the only name of the 3 whose stock price was still holding above the 200 day moving average, so it's relative strength compared to the 2 others was the best in the group. However in the weakness of mid August the stock dropped below its 200 day moving average nad has not really recovered - it did close above the 200 day moving average briefly for 2 sessions but quickly retreated. The chart has not yet gone to death cross status, but the 200 day moving average is $100 and the 50 day is $102, so its not far away. Some decent support for this name could be found down at $85; however with the technical set up on the chart, it is hard to be bullish on the name until it breaks above both its major moving averages on some solid volume. Again, until proven otherwise, this stock is a short at it retraces back up to its moving averages, until the pattern changes.

So why talk about 3 stocks I am not buying in the fund? Well here is a textbook case of stocks I like from a fundamental basis, or at least a group I like from a fundamental basis - but the charts are saying don't buy at this time. My favoritism towards Allegheny Technologies, aside from its superior chart in August was its direct tie to the Boeing (BA) Dreamliner launch. However, the test flights for the Dreamliner have been pushed back (twice now), and this might be having some damage to the near term prospects to ATI. With that said, these companies interest me in the longer term, but right now they make up very little of the portfolio. Here is a case where knowing just the most basic of technical analysis (selling stocks as they break major support areas) could save you a lot of portfolio grief.

Again, 2 ways to play these type of names - try to bottom fish them (but picking the correct spot is always difficult) or wait for the momentum to return to their names, as they reverse and break back above key resistance levels. As an individual investors, we will never have as much info as the 'big boys' or the 'market as a whole' so watching the price can usually tell us when there is some material fundamental weakness potentially ahead. So right now this group is on hold for addition to the fund until better price action emerges in the names.

SA/SS

Long Allegheny Technologies in the fund; no personal positions