The stock market has been in a strong uptrend since October fourth. This positive price and volume action has helped many top quality stocks with strong growth in earnings and sales setup in very bullish patterns. I have profiled many stocks over the past few months because the best performing stocks during market uptrends are the stocks with the best fundamentals that are outperforming the market via their Relative Strength.
The best performing stocks of the past 130 years show these same characteristics year in and year out. What works in the past works in the present as human emotions (greed, fear, hope) never change. What worked in 1880 will work in 2080.
Let's take a look at four stocks in the Retail-Specialty industry group with the characteristics needed to produce significant gains during this uptrend:
First up, my personal favorite, Ulta Salon Cosmetics & Fragrance (ULTA). Ulta Salon Cosmetics & Fragrance is a Bolingbrook, IL operator of 389 beauty stores in 40 states offering hair care, cosmetics, and other products, as well as salon services. The numbers this company is putting up is beyond impressive.
- EPS growth for Ulta Salon Cosmetics & Fragrance has been 56%, 62%, 188%, 150%, 79%, 41%, 61%, and 52% the past eight quarters. Spurring the EPS growth has been sales growth with gains of 11%, 16%, 19%, 18%, 19%, 20%, 21%, and 23% the past eight quarters. 2012 and 2013 annual EPS estimates show no signs of growth slowing, with gains of 45% and 25% expected respectively.
- Debt to shareholder equity is 0%, the return on equity is 21%, and cash flow is $2.10. With growth numbers like this, a high P/E ratio is to be expected. The current P/E ratio is 48 in the mid range of the 5-year range of 9-99.
- Management might only own 7% of the shares outstanding but mutual fund ownership is exploding. Mutual fund ownership has increased from 277 funds eight months ago to 513 today. The growth in the top and bottom line is the obvious reason for the increase in ownership.
Next up, the newest issue in the Retail-Specialty group, GNC Holdings (GNC). GNC Holdings is a Pittsburgh, PA operator of 2,917 and franchiser of 2,340 GNC nutrition stores worldwide, and 2,003 GNC locations within Rite Aid stores. This company might be a new issue on the NYSE but it already has a long history of making money.
- EPS growth, for the past eight quarters, has grown 50%, 32%, 47%, 37%, 50%, 36%, 56%, and 65%. During this time, sales growth has been solid with gains of 3%, 6%, 5%, 8%, 8%, 9%, 14%, and 16%. The growth is expected to continue, with 2011 and 2012 annual EPS estimates for gains of 41% and 17% respectively.
- Debt to shareholder equity is a high 166% but the company has a strong presence in its marketplace and with a return on equity of 17% and a cash flow of $1.40 it really isn't a problem. The P/E ratio is at the low end of its short range of 14-225 with a current reading of 20.
- Mutual fund ownership has grown from 147 funds to 177 the past two quarters. Mutual funds are more interested in the story than the company's own management as management only owns 5% of the shares outstanding.
This next stock is as good for your portfolio as it is for your pets. PetSmart (PETM) is a Phoenix, AZ operator of 1,187 Petsmart stores in 47 states and Canada with plans to open 45-50 (3%-4%) more in 2011-2012.
- PetSmart's EPS growth has been 11%, -2%, 24%, 32%, 23%, 26%, 33%, and 32% the past eight quarters. During this time sales growth has been slow but steady with gains of 3%, 3%, 5%, 6%, 7%, 8%, 7%, and 7%. 2011 and 2012 annual EPS estimates are for gains of 25% and 15% respectively.
- PetSmart currently has a 45% debt to shareholder equity, a 20% return on equity, and a cash flow of $4.12. The P/E ratio is in the higher end of its 5-year range of 9-26 at 20.
- These very strong numbers above is the main reason mutual fund ownership stands at 802 compared to 716 funds just four quarters ago. Due to the age of the company, management only owns 3%. This is normal when a company is more than fifteen years old on a stock exchange.
Finally, Sally Beauty Holdings (SBH). Sally Beauty Holdings is a Denton, TX operator of beauty supply stores offering hair care products, cosmetics, and other beauty items worldwide.
- EPS growth for the past eight quarters has come in at 27%, 30%, 46%, 38%, 64%, 69%, 37%, and 68%. Sales growth, during this same period, has grown 1%, 9%, 12%, 10%, 11%, 13%, 11%, and 13%. Just like every other stock in this industry group, growth is excepted to continue, with 2011 and 2012 annual EPS estimates for gains of 36% and 15% respectively.
- This stock is my "worst-of-the-best" due to it having an N/A for return on equity and debt to shareholder equity on my premium data provider. It does sport a nice cash flow of $1.06. The P/E ratio is in the mid range of its 5-year range of 6-37 at a current 18.
- For the mutual funds that are invested in Sally Beauty Holdings, it is all about the growth in EPS and sales. Mutual fund ownership has increased from 366 funds eight quarters ago to 508 in the most recently reported period. Like PetSmart, management only owns 3% of the shares outstanding. However, this company isn't fifteen years old. This is another minor inconvenience.
Fundamentals are the most important piece of the process when hunting for stocks to purchase for big potential gains. Technicals, however, tell me when it is the best time, on a risk/reward basis, to actually make my purchase:
- Ulta Salon Cosmetics & Fragrance has given me a buy signal with its breakout to a new 52-week high on heavy volume from a well-formed square-box base.
- GNC Holdings issued a buy signal when it broke out to new 52-week highs on November second. I did not take that buy signal and will look for another entry with a pocket-pivot point buy signal off the 10 day moving average.
- PetSmart will issue a buy signal with a breakout to a new 52-week high. However, the stock is not under the proper accumulation that the other stocks are currently under, since October fourth. Therefore, PetSmart will probably not issue a buy signal for me even if it does breakout to a new high.
- Sally Beauty Holdings will trigger a buy signal with a heavy volume bounce off the 50 day moving average that has been preceded by a lower volume pullback. It would also trigger a buy signal with a pocket-pivot point move off the 10 day moving average.
For the long term investor, these stocks are sure to make you happy and healthy for years to come.
Disclosure: I am long ULTA. I may initiate a long position in SBH, GNC over the next 72 hours.