Money
& Investing 
In a Tough Stock Market, One Needs to Find
“Special Situation Stocks”
-- a Look at FTI Consulting
The past several months in the stock market have been mean to the bulls. With a slowing economy, chances are that upcoming earnings’ reports will come under great scrutiny. A disappointing report or forecast and a stock could get decimated.
What is a bull to do?
The answer: Look for “special situation stocks”.
A special situation stock is one that is able to move higher despite a down trend in the general stock market and / or even in its industry group. There is something “special” about these stocks that gives them the ability to ignore a market decline and head higher.
Investing in special situation stocks requires three basic steps:
1. Find a candidate using technical analysis and screening
2. Study the company’s earnings and business
3. Time your trade near a breakpoint after a basing pattern
How do you find special situation stocks? You use what is known as a “bottoms-up" approach. That's an investment research style that de-emphasizes the significance of economic and market cycles. It, instead, focuses on the performance of individual stocks and heavy analysis of a specific company.
What you could do is screen for stocks (1) making new highs, (2) showing a daily price gain on big volume or (3) possessing a high relative strength (RS). A high RS means the stock’s price has been outperforming almost all stocks by a wide margin. A tool to use would be the Directional Movement ADX indicator found in eSignal basic studies for charts.
Using the eSignal Market Scanner, look under Power Scan. Next, use the Year Highs scan to look for candidates. Then, scan for high volume and search for stocks with daily big volume and with a good price gain.
To find high relative strength stocks, you could use Investor’s Business Daily’s (IBD) newspaper. You want to look for stocks with an IBD RS rating of more than 95. That means the stock has outperformed 95 percent of all stocks in the past 12 months. It is a great tool developed by William O’Neil, publisher of IBD.
The IBD RS rating is different from the Relative Strength Index in eSignal charts. That is often used as an overbought / oversold indicator. When checking the strength of the stock, you can use the ADX rating line on a chart. For a possibly strong stock, you would want a 14 ADX and a rating of more than 30.
The next step is to take that “candidate” and study its fundamentals to see if strong earnings are still possible. That can be done by looking at earnings estimates by analysts. If the forecasts are good, the stock could very well continue to “outperform”.
The third and final step is to enter your trade at a price near a breakpoint from a consolidation of at least five weeks. What you do not want to do is “chase” the stock and buy it after it has been running up.
One of the best-looking special situation stocks now is FTI Consulting Inc. (FCN). The stock is near a new high. (See the weekly eSignal chart.) It is in a strong up trend and showing good volume on up days. Finally, it has an ADX rating of 31.31.
FCN, based in Annapolis, MD, is one of the largest U.S. consulting firms. It focuses on litigation, corporate finance and restructuring, technology, communications and economic consulting. Annual revenues are 1 billion dollars. The company employs approximately 2,000 consultants and derives approximately 20 percent of its revenue internationally.
The strategic play is that FTI could do well in a difficult economy because its consultants could be called on to do special work in accounting and restructurings or other areas.
For the upcoming first quarter, analysts forecast that FCN's earnings will increase 31percent to 47 cents a share from 36 cents a year ago. For the year, earnings should rise 23 percent to 2.46 a share from 2 dollars a share a year ago. The stock has a 27 price-earnings ratio.
The following chart shows that FCN’s stock performance for the past 12 months is up approximately 115 percent while the Standard & Poor’s 500 index is down approximately 4 percent.
Another potential special situation play is Lindsay Corp. (LNN), a maker of irrigation equipment. The stock recently pulled out of a base at 80 and posted a big upside surprise in earnings for the fiscal second quarter ended February 29. It is at a new high and has a weekly ADX rating of 46. (See the eSignal chart.)
Analysts expect Lindsay to show a 72 percent surge in earnings for the fiscal year ending August 30 to 2.26 a share from 1.31 a share a year ago. Looking out to fiscal 2009, net should be up 33 percent.
Lindsay said total irrigation equipment revenues for the quarter increased 62 percent. It said demand for its products is strong globally due to higher commodity prices, bio fuel expansion and watering needs.
Mr. Fasciocco’s is publisher of Ticker Tape Digest at www.tickertapedigest.com. He is a contributing writer for several national publications. To get a free trial temporary subscription to the Ticker Tape Digest Pro Report, which comes out daily with a stock market video show, go to www.tickertapedigest.com and insert username: freetrial and password: stocks. Mr. Fasciocco can be reached at: leo2@tickertapedigest.com
