Today's Market: Investors Chasing Growth Should Look Here

by: Matthew Smith

We see this morning that global markets are rising, and the futures here in the US are up as well with the Dow set to open higher by 40 points as we wrote this. Asia is the strongest this morning, and rightfully so as a housing recovery in the US bodes very well for the Asian Tigers and their export driven markets. China is also easing concerns of many traders as their currency has fallen lately due to their new banking regulations enacted to keep the economy growing.

Europe is up, although less so. Now that the Greek news is behind us, and that seems to be disappearing from the world's headlines, we should see a rise in the euro over the next few months as the European Union is able to hold itself together. These are the events which come to define currencies and their safety, and should the Europeans learn their lesson here, they may rightfully remain one of the reserve currencies of the world moving forward. This morning the German market is up 0.5%, the CAC 40 up 0.47% and the FTSE 100 rising 0.17%.

We were pleasantly surprised by markets yesterday, as all indications early pointed to a day of red - much like Asia and Europe were experiencing until the housing numbers came out. We saw housing turning positive two quarters back in certain parts of the country which is when we went bullish on the general market. Yesterday's rally mirrored all of the rallies of the past few months, as big caps led the way higher and mid and small caps followed.

Apple (NASDAQ:AAPL) has been one of the market leaders, constantly on the new 52-week highs list and we believe that the trend of large growth companies leading the way higher will continue. We also believe that as the risk-on trade begins to gain momentum that the smaller caps will outperform the large market capitalization issues, but until that time picking your spots in this market will be key.

We think that tech might be in a bit of a sweet spot here as Apple has rewarded investors tremendously and the social networking stocks that spawned due to Facebook (NASDAQ:FB) have created thousands of millionaires overnight. Not trying to claim that we are in for a repeat of the late 1990s, but technology stocks are drawing in new investors and new money which previously was not in the market. The Facebook IPO should only bring further attention to the situation and possibly draw further new capital into the market. We like Apple here and will point out some of our other tech picks in the near future, but our point this morning is that investors need to allocate a portion of their portfolio to gain exposure to an area we think has a few more legs up.

One constant we have noticed over the past year or so of this market rally is that momentum has been an important factor in how many of the top performers actually performed. We want to play momentum here and we want to couple that momentum in the stock market with growth in the underlying business, both top line and bottom line if at all possible.

We have been watching Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) since having recommended it to some of our clients in the low and mid-teems range. Ulta has a great concept and continues to do their national rollout fueling top and bottom line growth which continues to push the shares higher. Ulta is constantly at the top of the 52-week highs list, and coupled with an improving economy and increased consumer spending, the shares should continue their rapid tear. We would take a look at shares here and on any pullback.

We are also drawn to Chipotle Mexican Grill (NYSE:CMG) as a stock that should continue on its march. The restaurant group is one we like to play the rebounding US economy, and Chipotle is one of the market leaders in the industry and in the stock market. We have seen McDonald's (NYSE:MCD) lose investors' faith recently, and although we think they can still deliver we find ourselves much more compelled by Chipotle and Darden Restaurants (NYSE:DRI), owner of Red Lobster and Olive Garden, which should both benefit much more than the 'Golden Arches' should the economic expansion continue - which we believe it will.

Many of the talking heads today were discussing the movement out of Treasuries and into high yielding junk bonds. We have been stating for some time that there would be massive flows of capital coming out of Treasuries, and we might be seeing this happening in earnest now. We agree with the thinking that after junk bonds the next best yielding asset class would be stocks, so this thinking further lends credence to our belief that the market can go higher as capital is reallocated. The world is no longer concerned with the return of capital but rather the return on capital.

This return on capital thesis is what we will be playing in the days and months ahead. Playing this via momentum fits our strategy right now, and we are inclined to pay for growth today as we see the premium for that growth increasing moving forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.