5. Cummins Engines (CMI)

5. Cummins Engines (CMI)

Sector- Industrial/Manufacturing

The 5th stock on our watchlist for 2013 is Cummins. Cummins is a state-of-the-art, large equipment engine maker. They are a leader in the Natural Gas engine transformations for big-rig trucking and industrial equipment. They have a very strong fundamental structure with very low debt and solid growth potential. As for the intermediate catalyst for this stock, Cummins would benefit from the recent resurgence of China's growth economy. Cummins receives over 30% of their sales from China and overseas markets. This positions them for a nice recovery in 2013 and beyond.

Cummins is a play on domestic and international industrial production. If the US and other large global economies continue to improve, Cummins will be a big winner. If however, growth slows and one or more of these economies slip into recession, Cummins will likely suffer more than most. I am a believer in the continuation of the economic improvement and therefore like Cummins' prospects going forward.

The stock has lagged the overall market this past year, but has recently been showing signs of strength.

This is once again the Inverse Head and Shoulders formation that we like to see when a stock is beginning to reverse its prior downtrend.

If we look at the longer term picture we can see that the trend is still up despite the weakness we have seen in the past year. Actually we are just bouncing off of the lower trend support and this looks like a solid risk/reward.

Since its low in 2008 the stock price increased by 5x over the next 4 years, setting a new high early in mid 2011. Just to be clear, a rally from $24 per share to over $125 in 3 years is a monster gain! After that huge move in the stock, price has remained fairly strong since and has moved sideways for a year and a half.

When a stock rallies like this one has it will try to find equilibrium and it will consolidate the large gains. Stocks consolidate in two ways, sideways through time or by pulling back to a key support area before regaining the upward momentum. From a strength standpoint we like to see the consolidation sideways; a sideways consolidation shows very strong underlining interest in the stock.

I like the strength we have seen in CMI both in the shorter term and the longer term. I currently own this stock and will look to add to my position as long as it continues to cooperate. As for warning signs, I would begin to worry if price slips below $100 in the short term. And I would have no interest in being in the stock below the key support at $80. That would signify a break in the long term trend and also create a lower low in the stock. These would both be bad signs for the intermediate term and I would look elsewhere for lower risk ideas.