The stock market produced a strong rally last week, with Wednesday’s volume coming in well above average on the Nasdaq and S&P 500. This positive development, in the middle of all the negative news headlines, is good news for bulls. Since Wednesday, the market continues to trade well, and volatility appears to be dissipating. At the same time, my scans of top stocks based on fundamental and technical analysis continues to grow daily.
There are three high-quality stocks that I have my eye on for possible longs. All of the stocks below sport huge growth in their fundamentals and are being accumulated (heavy volume on up sessions) as they breakout or near breakouts to new 52-week highs.
130 years of stock market history proves that the best stocks year after year sport certain key fundamental and technical characteristics before they make huge price gains. Let’s go over these statistics below, on each stock.
We will start off with DealerTrack Holdings (NASDAQ:TRAK). DealerTrack Holdings is a Lake Success, NY, provider of software and services that link automotive dealers with financial institutions and credit reporting agencies.
DealerTrack Holdings EPS has risen 0%, 7%, 58%, 260%, 92%, and 113% during the past six quarters, compared to the year before. During this time, sales growth has come in at 7%, 7%, 16%, 36%, 44%, and 52%. Annual EPS estimates for 2011 and 2012 are for gains of 88% and 11% respectively.
DealerTrack Holdings sports a debt to shareholder equity of 0%, a cash flow of $0.96, a return on equity of 5%, and spends 5.5% of revenues on R&D. The current P/E ratio of 28 is in between the 5-year range of 11-48. Mutual fund ownership is on the rise growing from 218 to 264 funds during the past four quarters. Management also has a stake in the company’s success, owning 7% of the shares outstanding.
Next, we have Allot Communications (NASDAQ:ALLT). Allot Communications is an Israeli provider of network optimization products for service providers to manage network traffic and internet access. Allot Communications is undergoing huge growth, with EPS rising 120%, 125%, 250%, 600%, 600%, 700%, 233%, and 160% the past eight quarters. Sales growth, during this period, has risen 21%, 33%, 36%, 35%, 41%, 38%, 35%, and 37%. Annual EPS estimates for 2011 and 2012 are for gains of 159% and 25%, respectively.
Allot Communications carries 0% debt to shareholder equity, a cash flow of $0.28, a return on equity of 6%, and spends a solid 19.8% of revenues on R&D. Its current P/E ratio of 45 is in the lower end of its historical 5-year range of 25-147.
Savvy mutual fund investors have caught on to the story, with fund growth accelerating from 11 funds five months ago to 78 currently. Management still has as strongly vested interest in making sure the company continues to produce, owning 17% of the shares outstanding.
Last but not least, Fortinet (NASDAQ:FTNT). Fortinet is a Sunnyvale, CA, developer of unified threat management systems to provide security and networking functions through integrated circuits. Fortinet’s EPS has grown 17%, 0%, 0%, 29%, 57%, 125%, 80%, and 44% the past eight quarters. Sales growth, during this time, has increased 20%, 29%, 24%, 29%, 32%, 34%, 35%, and 37%. 2011 and 2012 annual EPS estimates are for gains of 48% and 16% respectively.
Fortinet sports a 0% debt to shareholder equity ratio, a cash flow of $0.39, a return on equity of 24%, and spends 15.3% of its revenue on R&D. The stock is at the high end of its 5-year historical P/E ratio range of 29-72, coming in currently at 61. Mutual funds clearly could care less about how “expensive” it appears to value investors, as fund ownership has exploded from 149 funds to 509 the past eight quarters. Management still owns 22% of the shares outstanding, clearly indicating the are invested in the future.
All of these stocks have the fundamentals necessary to produce large gains, if the market can continue to rally. However, just going out and buying these stocks blindly is the play of an amateur or uneducated investor. Savvy investors know that while fundamentals tell you what to buy, they are useless when it comes to timing stock purchases. For that, we need technical analysis.
DealerTrack Holdings is currently breaking out to new 52-week highs. Volume is not convincing enough on this move to make a purchase here. If it can pull back and bounce off the 10-day moving average on heavy volume, triggering a pocket-pivot point buy signal, I would start a position in this stock. A bounce off the 50 day moving average is another area I am looking to purchase shares.
Allot Communications is nearing a breakout to a new 52-week high. If it can form a consolidation pattern here and break out on strong volume, I would look to initiate a position in this stock. If it continues to wedge higher here, I will look for pocket-pivot signals off the 10-day moving average to enter the stock.
Fortinet is in the exact same position as Allot Communications, is as it is just inches away from breaking out to a new 52-week high. If Fortinet can continue to base here and then break out on strong volume, I will look to begin purchasing this stock. If the stock wedges higher, the 10-day moving average will become the next area of support I will look for a possible entry.
All of these long positions depend on one thing: the overall market. If the market does not continue to move higher with periods of accumulation and instead rolls over, these longs will not be initiated. The overall stock market must remain in an uptrend for these stocks to be considered possible long positions. I do not buy a stock market that is selling off; I short it.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TRAK, FTNT, ALLT over the next 72 hours.