Nine Potential Breakout Stocks

TK All-Star posted on 08/09/12 at 12:12 PM

Alan Brochstein identifies nine stocks with potential price and fundamental momentum near their 52-week high

As I type, the S&P 500 is posting new highs for the summer, crossing 1400 for the first time since early May and sitting within 1.5% of the 1422 interim top set in early April. While it sure seems like we remain in a bull market that just corrected, investor sentiment seems downright bearish. Some point to various polls to make this point, but I like to go right to the best tell:  Mutual Fund flows.

You can visit the Investment Company Institute (ICI) to get the data yourself, but it continues to strongly suggest that individual investors are exiting stocks and piling into bonds. In the last four weeks (through 7/25), the data suggests that investors pulled almost $7 billion from domestic equity and purchased almost $20 billion in bonds. This, of course, is nothing new, as these trends have been intact since 2008.

I have been surprised by how long individual investors have been decreasing exposure to stocks. It is intriguing that over this time-frame, stocks have recovered almost all of their losses in aggregate, with many stocks exceeding their former highs. I continue to believe that the stock market is reasonably valued and offers decent returns ahead, and the pessimism reflected in the mutual fund flows encourages me from a contrarian perspective.

Three months ago, I shared a screen for “breakouts”, suggesting that coming out of a consolidation, as we appear to be doing now, can be a smart time to look for stocks that perform well during the consolidation. That screen led to nine stocks to consider, and most of them have performed well. With this in mind, I decided to run a similar screen.

Using Baseline, I included some parameters that look at technicals and fundamentals. Here is what I did (and why):

  • Stocks from the Russell 3000 index, with market cap > $500mm
  • QTD price return >2% (better than the market)
  • YTD price return >11% (better than the market)
  • 12 month price return > 16% (better than the market)
  • 5 year price return > 0% (S&P 500 is down 4%, so this is a great LT momentum indicator)
  • Price < 1.6X 52 week low (let’s not chase)
  • Price within 4% of 52 week high (this is what we are trying to eclipse)
  • 2012 estimated EPS growth > 14%
  • Trailing 1-Year EPS growth >15%
  • Trailing 1-year sales growth > 10%

If I can summarize, our goal is to identify stocks that are “working” but aren’t particularly aggressive.  The stocks are performing better than the market in terms of price action as well as sales and earnings growth.  My hope is that some of these stocks are cheap enough and in a good enough technical position that the breakout, if it happens, leads to a sustainable long-term advance. Here are the 9 new names that made the cut:

Please keep in mind that these are not recommendations. I have to say that I am impressed by this list. First, the names come from a variety of economic sectors. Second, the list spans market caps from Small-Cap to Large-Cap. Finally, the metrics suggest reasonable valuation, with only two stocks above 20PE despite earnings growth over the past year of at least 23% in all cases.

I have included some additional information, including the net debt to capital, with the stocks having very low levels of debt shaded in green. 3 of the companies have cash in excess of debt, while Monsanto (MON) has just a slight amount of debt adjusted for cash. MON may benefit from the recent drought, as awareness for its drought-resistant seeds increases.

In terms of valuation, most of the stocks trade above the market multiple of 13X or so. I highlighted those that trade at a 0.8X or less their 10-year median valuation, while also highlighting in red the one stock, IAC/Interactive (IAC), which is trading at a higher PE.

The only name on the list that was on my prior potential breakout list, which was formed somewhat differently, is ResMed (RMD), which I had mentioned that I liked and had recently added to my watchlist. I had suggested that the stock could trade to 41 over the next year based on 18PE and adding back $3.50 per share in cash. After a very strong report, I have a potential updated target of 43.50 using the same metrics (now $4 per share of net cash).

Screening is a tool to identify stocks to study more closely for potential investment. In this case, we have identified 9 stocks that appear to have the potential to breakout of consolidation patterns or have just broken out. Whether the market continues to rally or not, some of these stocks may continue to perform well.

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  No positions in any stock mentioned

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Posted by TK All-Star on 08/09/12 at 12:12 PM


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