During this rough market environment since July, very few stocks have shown consistent heavy accumulation in their shares. This is normal for market pullbacks. During these pullbacks, there are always some new small-cap stocks that you can visually see being accumulated by funds with a lot of capital.
This shows up clear as day on a daily/weekly price and volume chart where these stocks will rally on very heavy volume while the market sells off. Big up days on heavy volume in a bad market hints at a future leader during the next uptrend.
Just because a stock is being accumulated very heavily, while the market doesn’t do anything, doesn’t mean a future of strong price performance is guaranteed. When I see these funds accumulating stock I have to see fundamental reasons as to why they are doing this or else the investment is simply too risky.
As with all previous big stock market winners during the past 130 years, I must see the same characteristics in the current names or else it is a waste of time and money. In previous articles I have gone over what those characteristics are but let’s review them one more time.
The best stocks all show seven main characteristics. They all have very strong current EPS and sales growth, have strong future EPS estimates, are leaders rather than laggards during the past six months price wise in their sector, have new products or the stock is hitting new price highs, are liquid in terms of daily trading volume, and are in a top industry group leading the market over the past six-months based on price performance.
While the market is not in the best position to rally right now, as we are still bogged down in an overall downtrend since the sell-off started in July, the market will move higher again. When it does the last piece of the puzzle will be in place for me to look for entries into the stocks below. Let’s take a look at our possible future leaders during the next uptrend and the key fundamentals that can make them future leaders.
Datalink (DTLK) is a Chanhassen, N.M., provider of customized network information storage infrastructures and related services for enterprises in the United States.
Year-over-year EPS growth has been 11%, 150%, 20%, 267%, 140%, 999%, and 217% during the past seven quarters. During that same time sales growth has been 8%, 57%, 62%, 62%, 76%, 37%, and 26%. EPS estimates for 2011 and 2012 are for gains of 78% and 11% respectively.
The company carries 0% debt, has a cash flow of $0.44, a Return on Equity of 12%. Even though it is meaningless when hunting for big stock market winners, Datalink sports a P/E ratio of 13 which is in the lower half of the five-year range of 6-53.
I like to see that management still owns 16% of the shares outstanding showing that they are invested in the company’s future. The financials Datalink is posting are also contributing to the growth of mutual fund ownership as the number of funds invested in the stock has jumped from 42 to 60 during the past four quarters.
Mitek System (MITK) is a San Diego, Calif., company that offers mobile application and software development toolkits that use intelligent character recognition technology.
EPS growth has been spotty but has grown 100% and 125% the past two quarters. More importantly, EPS estimates for 2011 and 2012 are for gains profits of .03 a share and .24 a share respectively. So the company has turned the corner to profitability after years of losses. This is clearly due to sales growth, which has increased 15%, 71%, -11%, 103%, 21%, 89%, and 260% during the past seven quarters.
The company has debt-to-shareholder equity of 68% and a negative cash flow of -0.03. However, with profits growing on higher sales volume these numbers should improve in the future. Clearly exciting things are happening at the company as it spends 39% of its revenue on Research & Development.
This is why management still owns 23% of the shares outstanding and why mutual fund ownership has increased from 1 to 5 funds during the past four quarters. By next quarter, there will be even more fund ownership, just by looking at the accumulation this stock has been under the past two months.
C V D Equipment (CVV) is a Ronkonkoma, N.Y., manufacturer of chemical vapor deposition systems, gas/chemical delivery control systems, and reflow ovens/rework stations.
EPS growth has come in at 100%, 50%, 187%, 567%, and 800% during the past five quarters. Sales growth during the past four quarters has risen 13%, 500%, 67%, and 122%. EPS estimates for 2011 and 2012 are for gains of 330% and 12%.
Debt-to-shareholder equity is only at 21% and with cash flow of $0.23 and a Return on Equity of 3% that is very manageable. The P/E ratio is at 45, which is still in the lower end of its 5-year range of 12-150.
The most interesting part in the financials is that management still owns 39% and is clearly invested in the company’s future. Mutual funds are doing the same with ownership of the stock increasing from 4 to 12 funds during the past three quarters.
Staar Surgical (STAA) is a Monrovia, Calif., developer of visual implants and other ophthalmic products to treat cataracts and glaucoma. Their products are also used for refractive surgery use.
EPS growth has turned positive the past two quarters with gains of 150% and 200%. EPS estimates for 2012 are for gains of 100%. Sales growth the past five quarters have grown 13%, 4%, 6%, 8%, 8%, and 19%. While the sales growth is a little slow it is still consistent.
The company carries only 6% debt but I never like to see it with a negative cash flow of $-0.04. I also do not have any data available for Return-on-Equity from my data provider, which always bothers me when looking at a potential leading stock.
Management may only own 8% of the shares outstanding but mutual funds are clearly interested in this company as ownership has grown from 50 to 122 the past eight quarters. These mutual funds now own 56% of the float of the stock.
Fundamentals are the most important item when it comes to finding winning stocks but technicals tell me where to purchase these stocks. As long as the heavy accumulation continues in these stocks, I am looking to enter with either a heavy volume bounce off the 50-day moving average or a breakout from a legitimate basing pattern. If that doesn’t set up correctly, I will look to buy some off the 10-day moving average as long as volume is higher than on any of the previous 10 days of down sessions.