Rally Should Proceed: 3 Laggards, 2 Leaders To Help You Catch Up

by: Alan Brochstein, CFA

I have to be careful with my trumpet, as it seems like the last couple of times I have tooted my bullish horn, the market has turned on a dime. Certainly bears should be happy to see this post! Kidding aside, it looks like the bullish views I shared in late October are finally playing out, leaving me optimistic that we will take out last April's highs soon.

The first five weeks of the year, all of which have been positive, have left the S&P 500 up 7% so far. While I feel like we are a little overbought and at some near-term resistance, here are some signs that the rally should proceed in the next few weeks:

  • The NASDAQ made a new high
  • The DJIA has cleared its highs from 2011
  • Several sectors have made new highs, including Technology (NYSEARCA:XLK) and Consumer Discretionary (NYSEARCA:XLY)
  • Several sectors remain well above the April highs, including Consumer Staples (NYSEARCA:XLP), Health (NYSEARCA:XLV) and Utilities (NYSEARCA:XLU)
  • S&P 600 Small-Cap made an all-time high

If you aren't yet involved or aren't as invested as you would like to be, there is no need to worry: I have some ideas! Here are 5 names I currently like, three of which have lagged the S&P 500 since year-end while two are ahead of the benchmark (click to enlarge image):

Before I share a few thoughts on these names, which are ranked by YTD returns (ascending), notice that I have included choices from four economic sectors (doubling up on Tech, which is the largest one). Most of the names are mid-caps, but I threw in a mega-cap as well as a small-cap too. On the far right, as you can see, all of these companies have been growing top-line and EPS at double-digit paces. I picked these stocks because I expect each of them can generate sharply higher growth than the 5-10% or so projected 2012 growth for the S&P 500.

First up is Google (NASDAQ:GOOG), which is down 8% YTD and 11% from its recent multi-year high after the Q4 report disappointed investors. I had my eye on this one and pulled the trigger after the report, adding it to my Top 20 Model Portfolio following the sell-off. It's not the cheapest Tech mega-cap, but it seems to offer good value relative to the growth, especially taking into account roughly $85 per share in cash (after the Motorola deal closes). GOOG is the only stock on the list underperforming over the past two years, but by just a little. Over the past five years, it has been a strong performer, and I think the stock looks good technically. Note that it is still above the 200dma. I believe that the pending Facebook (NASDAQ:FB) IPO could draw some attention favorably to GOOG. My target for GOOG a year from now is 887, based on 16PE and crediting the company for the cash.

I just added Luminex (NASDAQ:LMNX) to my watchlist recently, but I am familiar with it since a client of mine has owned the stock over the past year. Based in Austin,TX, LMNX sells equipment and consumables and receives royalties for biological tests This is clearly the most aggressive name I am discussing. CEO Patrick Balthorp, who has served in that role since 2004, spent two decades with Abbott Labs (NYSE:ABT), including running its worldwide commercial diagnostics, before taking on the role of President running Fisher Healthcare. The company's sales are primarily non-capital equipment. Almost 70% of sales are related to clinical diagnostics, while the balance is life science research. The 70% Gross Margin is indicative of the quality of this company in my view. The company has invested 17% of sales into R&D this past year. I think that this stock can command a valuation of 32PE plus cash (about 2.50 per share) a year from now, suggesting the potential to reach 28. Companies like this have been fodder for M&A over the past few years too. LMNX reports on 2/6 and has tended to be quite volatile around earnings results. Short-interest is 9%.

I have long been impressed by Middleby's (NASDAQ:MIDD) CEO, Selim Bassoul, who has dramatically grown the company during his tenure over the past eleven years with a string of bold acquisitions. Despite tough times, the company grew organically last year. This stock has a high PE relative to its average over the past five years, but I am expecting that earnings can come in significantly higher than analysts currently project as the environment for its customers (restaurants) improves. MIDD has products that help restaurants save time and money due to their speed of use and energy efficiency and a huge installed base to upgrade. MIDD has a bit of debt, but it appears to be manageable. I think that this stock could get to 130 or so over the next year based on 20PE. This stock has been banging up against the all-time high for a year now, and I expect that it could break out when the company reports later this month.

We added TechData (NASDAQ:TECD) to the Top 20 Model Portfolio a year ago, and I have followed the company for more than a decade. These buys are great blockers/tacklers in the electronics distribution business. Despite more than 50% of sales coming from Europe, the company has been doing a good job over there on sales and margins. The company has been aggressively buying stock but still has over $10 per share in cash net of debt. At 10 PE before considering the cash, the stock appears very inexpensive to me. My target is 75, based on 12.5 PE. Fantastic chart in my view!

Last up is EZCORP (NASDAQ:EZPW), which I have been highlighting on Seeking Alpha since 2008. I added this one back to the model this summer. While there are concerns about regulation, EZPW's exposure to payday lending has been dropping rapidly due to diversification through international expansion directly and through JVs. Credit is likely to remain constrained for years to come, which bodes well for EZPW. The stock trades at less than 10PE despite consistent strong sales and earnings growth. I think it can get to 47.50 over the next year (13PE). This is the only stock on the list that trades below its 200dma - the recent action has been somewhat frustrating.

So, hopefully at least one of these diverse picks will stimulate you to dig a little deeper. Three of the names are among my best current ideas, while the other two are near the top of my list for potential inclusion in the Top 20 Model Portfolio.

Disclosure: As disclosed in the article, EZPW, GOOG and TECD are in the Top 20 Model Portfolio at InvestByModel.com