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 There is an old saying: “A bull market can make anyone look smart.”
However, for astute investors, the goal in a bull market is not just to find winners, but “big winners”. The name of the game is performance. This means that you must quickly recognize the leading stocks and load up on them while getting out of the lagging issues quickly.
It can be tricky, but that is the goal for those who want to do extremely well.
Some investors have a tough time differentiating a leading stock from a lagging stock. They may think a “leading stock” is the biggest company in an industry, such as an International Business Machines Corp. (IBM) or a General Motors Corp. (GM).
Wrong!
A leading stock is one whose stock price is “outperforming” practically all other issues. The stock could be well known or not, big cap or small cap, or listed on the NYSE or NASDAQ.
Current Leading Stock Examples
An example in the current bull market would be Apple Computer Corp. (AAPL) in the computer sector. It has been showing powerful earnings aided by the success of its iPod product. Apple’s stock soared from 6 in March of 2003 -- the start of the bull market -- to a peak of 86 earlier this year. It is now at 66. It has pulled back and is in a basing pattern.
In the medical arena, a key leader is little-known Psychiatric Solutions Inc. (PSYS), an operator of psychiatric inpatient hospitals. Profit growth is running at 30 percent. The stock skyrocketed from 3 in March of 2003 to 32. It is now in a two-month flat base.
Examples of other leading stocks are the building products firm, Eagle Materials Inc. (EXP), which rose from 10 in 2004 to 71, and, in the usually mundane food area, Hansen Natural Corp. (HANS), a beverage producer, the leader, moving up from 10 two years ago to 125.
In the apparel sector, Gilden Activewear (GIL), a maker of tee shirts, has sprinted from 15 two years ago to 46, and, in the red-hot oil sector, Ultra Petroleum Corp. (UPL) is a key leader, surging the past three years from 12 to 62.
You might ask, “Well, it is easy to find leaders after they have moved up quite a bit. How do you find them before they have pulled away?” The answer is that you need to know the general characteristics a potential leading stock shows prior to its big move and make sure you are in a bull market.
Picking a Leading Stock
Know the environment: Are you in a bull market or bear market? A bull market comes after a bear market in the normal cycle of stock prices. The key is to be aware of where you are in the cycle. You can look at charts of the major averages and discern the basic trend by looking for higher highs and higher lows.
eSignal’s charting tools are a big help. You can also use moving averages, oscillators and cycle indicators to better confirm the precise status of the general market.
An important confirmation that you are in a bull market is that a growing number of stocks are making 52-week highs. This is very important. An economic confirmation is that corporate earnings will be expanding, and the economy will be picking up steam.
Interest rates will rise too. This spooks some investors. However, rising interest rates will only affect the bull market in the late phase when other signs, such as slowing earnings growth, start to appear.
For stock selection, one can use three keys. First, seek stocks of companies with projected earnings growth of more than 50 percent for the current year and possibly the next. If you can get it, go with the firm with “accelerating quarterly earnings”. This means that the firm’s quarterly net will not only be rising, but at an accelerating rate.
An example would be when you see the net for the first quarter rising 50 percent, the second quarter 120 percent and third quarter 200 percent.
You might say: “Wow! That eliminates a lot of stocks.” That’s right. You are looking for the best.
Secondly, you want a stock that is making new 52-week highs, and better yet, all-time highs.
Finally, you want a company that has something new going for it -- a new product or a new service. The more dynamic this is, the better. A good “story” always attracts more buying interest in the stock.
The timing of the buy should be when the stock moves up from a sideways price consolidation of at least six weeks. You do not want to buy a stock that is too extended in price from its most recent price base.
Do we have any candidates?
There are two in the oil sector. Atwood Oceanics (ATW), an oil drilling firm, is at $54.86 and hitting new highs. This fiscal year ending September 30, net will soar 205 percent and next fiscal year 127 percent. GlobalSantaFe Corp. (GSF) is at $63.58 and trending higher. The oil driller’s net should jump 149 percent this year and 69 percent next year.
Some other candidates would be Insituform Technologies Inc. (INSU) selling at $27.06, Atheros Communications Inc. (ATHR) at $27.40, Rogers Communications (RG) at $38.40 and PDF Solutions Inc. (PDFS) at $18.39.
Note: The charts in this article were captured from eSignal. To find out more about how you can get streaming, real-time quotes from all the markets, plus streaming charts, news and Market Depth, go to: www.esignal.com. |
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