With a successful test of the February lows in place and bearishness still very high, a near-term rally for equities may gain some legs over the next two weeks. Due to the ease with which shorts have been able to operate of late, a 1-2 week rally would serve to shake out many “late-to-the party” bears from their positions and give the remaining bulls some much needed hope that the bottom is in. While we feel that these bulls will be disappointed as the February lows ultimately give way, ushering in an official bear market confirmation, any near-term rally could be vicious and played selectively from the long side.
Stocks that have held up the best during the recent collapse stand the best chance of posting solid gains in the near-term. Just take a look at Tuesday’s action in Autozone (NYSE:AZO) to understand what we mean. After a brief test of its 50-day SMA during the “Flash Crash,” AZO broke out to all-time highs on Tuesday after earnings blew through estimates. With the stock already in strong hands and displaying impressive relative strength ahead of its report, AZO sprinted 10 points higher on a 400% increase in volume, surely putting a smile on Eddie Lampert’s face on Tuesday night.
In the hopes of being prepared should any follow-through develop, we ran a scan today for stocks that have displayed the same relative strength seen in AZO before it broke out. We came up with ten stocks. Each of these stocks possesses solid fundamentals, along with sterling technical action. What exactly do we mean by sterling? Well, it’s pretty simple. All ten stocks are within spitting distance of their 52-week highs, never came close to breaking their respective 50-day SMAs, and did not flash any days of high-volume selling over the past three weeks. Here is a quick description on each, along with specific levels to watch in the near-term:
Acacia Research (NASDAQ:ACTG): Doubted by many over the past few years for its novel approach to patent-litigation, Acacia seems to be firing on all cylinders. The company recently posted impressive earnings in its first quarter. Watch for a close above $15.9. Should such a move occur, it could position the stock for a quick move toward $17-$17.50.
Acme Packet (NASDAQ:APKT): With the likes of Cisco (NASDAQ:CSCO) and Juniper (NYSE:JNPR) having already broken below their respective 200 day SMAs, Acme Packet’s continued resiliency bears watching. APKT has posted seven enviable quarters of sequential revenue growth. After growing heartily through the most recent recession, APKT’s earnings are poised to accelerate throughout 2010. Should the company get taken out by a bigger player, the company could easily fetch $40 a share. Watch for a move above $27.5 on a closing basis.
Coinstar (NASDAQ:CSTR): Coinstar simply does not go down. The stock is heavily shorted, with 7.75 million of its 31.7 million shares outstanding currently short. Although we feel that the shorts will ultimately be right later this year, in the near-term, a big short-covering rally could ensue with any close above $55.5.
Delcath Systems (NASDAQ:DCTH): Delcath Systems, Inc. develops and manufactures devices to administer high dose chemotherapy and other therapeutic agents directly to diseased organs or specific regions of the body. The company is currently developing the Delcath Percutaneous Hepatic Perfusion (PHP) System, a Phase 3 clinical trial product, which isolates the liver from the patient’s general circulatory system and delivers a high dose of melphalan hydrochloride or other therapeutic agents directly to the organ.
On April 21, Delcath provided an update to its PHP System Phase 3 trial stating “it resulted in a more than 50% reduction in the time-to-tumor progression or death compared to treatment with the best alternative care.” The full data set on the PHP system is to be presented at ASCO on June 5. Delcath expects to begin its rolling NDA submission within 30 days and file its final module by September, 2010. Research analyst, Jason White at Cannacord Adams, recently estimated that PHP System sales could reach $700M for melanoma treatment alone, upon approval by the FDA. He currently has a $21 price target on the stock. We expect any forthcoming US approval to be a major catalyst for increased price appreciation. Watch for any near-term move above $15.6.
DG FastChannel (NASDAQ:DGIT): With earnings growth of 400% last quarter and sales up over 30%, digital technology services provider, DG FastChannel’s stock has been one of the chosen few to have remained untouched during the recent market swoon. Typically, super strong stocks such as DGIT will break out ahead of any confirmed market rally. We therefore have this at the top of our watch list, waiting for our buy point of $42.5 before buying into the name.
Netflix (NASDAQ:NFLX): Although some technicians will point to Netflix’s action on May 13 as a climax-top, one final push toward 52-week highs could still be in the cards for the stock. Watch for a close above $107.75 to signal renewed vigor that could propel the stock toward its highs.
Sandisk (SNDK): While chip stocks have been breaking down left and right, Sandisk stands above all others. Earnings estimates for 2010 have risen 50% over the past 90 days to $3.71 a share. Any move through $43.7 could usher in a move to new highs for SNDK.
Synergetics (NASDAQ:SURG): A few weeks ago Synergetics secured a game-changing licensing, settlement and supply agreement with Alcon (NYSE:ACL) a $7.5 billion company considered the Microsoft MSFT in the ophthalmology space. The licensing and settlement deal with Alcon puts the company on the map and validates their IP and next-generation technology. In addition, the deal dramatically improves the company’s balance sheet from one beholden to $11 million in net-debt to a company now with $6 million in net cash on its balance sheet. The dramatically improved balance sheet is a big deal for SURG when you consider its market cap is only $70 million. Earnings should be set to accelerate over the next few quarters and we see $.40 of earnings potential next year for the company. Watch for a close above $3.
Thoratec (NASDAQ:THOR): With the approval of its next-generation implant, the HeartMate II LVAS, providing Thoratec a new avenue for growth, the company’s stock has held up very well through the recent market downturn. Short interest is quite high in the stock. Considering how well the stock has been acting, any move through $43 in the near-term could propel the stock to the mid-to-upper $40s before the shorts regain control.
Valassis Communications (NYSE:VCI): Like many of the other stocks featured in this piece, Valassis Communications is only 5% away from its recent 52-week highs. A move through $35.50 could usher in a quick jaunt to $37-$38.
Disclosure: Long DCTH and SURG; Looking to get long other names at featured buy points.