Southwestern Energy (SWN)

Previously we profiled the energy space, which we’ve identified as a source of emerging new leadership. Of all the stocks in the sector only one has traded within 5% of its 2008 all time high: Southwestern Energy (SWN). The reasons are clear: SWN is a major player in natural gas with low cost of production and expanding supplies.

Incredibly, the company’s earnings barely took a hit this year as the price of natural gas simply collapsed. What’s more, analysts expect growth to resume next year as if it never trailed off. Estimates call for $2.17 next year as opposed to $1.54 last year. In other words, if you discount this year’s projection of $1.47, it would be as if SWN expanded earnings by 20% this year and would be projected to have 20% growth yet again next year. O’Neil says it’s a real sign of power when a company’s earnings hit a snag and then resume as if they had continued their acceleration all along.

These reasons, and the resurgent price of natural gas, are why SWN is within spitting distance of all time highs and has shown far greater resilience than other stocks in the sector.

Technically SWN has broken out of a 15 month cup and handle base, best seen on the weekly chart. The decline in the cup was a staggering 64%. That would normally be a red flag but growth stocks can correct 1 ½ - 2 ½ times the correction of the major market indices, and with the NASDAQ and S&P 500 both having corrected in excess of 55% SWN’s correction was not unusual.

The daily shows the ideal buy zone as price broke a trend line across the tops of the handle, which is also a cup with handle base by itself. This “base within the base” corrected only 26%, more in keeping with what we would perceive to be a healthy correction and one capable of sustaining a significant advance.

The dollar has rebounded a bit within its downtrend as the market corrects, bringing energy prices down and related stocks with them. We would consider entry on a constructive light volume pullback to minor support at the base highs or the rising 20 or 50 MA’s.

Note that if the market pullback becomes an intermediate term correction we wouldn’t want to initiate a position in SWN, but would look to position ourselves as the market appears set to rebound. Bear in mind a correcting market will often take down most stocks, even those that are commodity related.