The stock market has resumed its uptrend, following last week's bump in the road. While the market is hitting new highs, it appears that this time around investors are not as bullish as they were in February. That is unfortunate for them, as many stocks across many different sectors are hitting new highs or are setting up in proper consolidation patterns that lead to new highs.
One of the most explosive areas in the stock market, right now, is in the IPO universe. Just this past week, Demandware (DWRE), Brightcove (BCOV), Guidewire Software (GWRE), Francesca (FRAN), Bazaarvoice (BV), and U.S. Silica (SLCA) produced explosive gains.
While the IPO market is currently on fire, there are a few stocks in this bunch that has what it takes to produce explosive gains for investors with short-term and long-term time frames.
When hunting for the best stocks in the stock market, 130 years of research has proven that strong and fast growing fundamentals are what is needed before a stock begins its biggest and longest price advance.
We will start it off with Tangoe (TNGO). Tangoe is an Orange, CT developer of on-demand life cycle management software for enterprise communications assets and services.
Tangoe has grown its EPS 167%, 167%, 400%, 500%, 150%, 200%, 167%, and 100% the past eight quarters. The growth in earnings can be directly correlated with the growth in sales. Sales have grown 22%, 23%, 21%, 24%, 40%, 56%, 59%, and 57% the past eight quarters. This growth is expected to continue in the future with 2012 and 2013 annual EPS estimates for gains of 62% and 36% respectively.
Tangoe has a cash flow of $0.35, spends 13.6% of its revenue on R&D, and has a solid return on equity of 32%. My data provider MarketSmith does not have data available for debt to shareholder equity. The P/E ratio is at a current 66 which is near the high end of its short historical range of 35-74. However, a high P/E ratio should never be a reason to invest or not invest in a stock.
Mutual funds like what they see as mutual fund ownership has increased from 100 to 132 the past two quarters. These funds now hold 66% of the shares in float. Even better, management owns 37% of the shares outstanding. It is always good to see management invested in their company's future.
Another high-growth stock is Fusion-io (FIO). Fusion-io is a Salt Lake City, UT developer of storage memory platforms for data decentralization enabling customers to improve processing capabilities.
Fusion-io's EPS has grown 213%, 167%, 350%, and 600% the past four quarters. These recent numbers are being ignited by explosive sales growth. Sales have grown 705%, 162%, 465%, 337%, 403%, 556%, 175%, and 169% the past eight quarters. This growth is expected to continue in the future with 2012 and 2013 annual EPS estimates for gains of 108% and 44% respectively.
Fusion-io carries 0% debt to shareholder equity, has a cash flow of $0.17 a share, a return on equity of 9%, and spend 13.8% of its revenue on R&D. The P/E ratio is at a current 79 which in the low end of its short historical range of 43-308.
Mutual funds have really noticed the growth recently as mutual fund ownership has increased from 123 to 133 to 222 funds the past three quarters. Mutual funds now own 66% of the float. Management clearly expects more from this company as management owns a whopping 56% of the shares outstanding.
Next, we have InvenSense (INVN). InvenSense is a Sunnyvale, CA manufacturer of motion processing ICS and related software for consumer electronics devices for the video gaming industry.
InvenSense EPS has taken off recently, growing 160%, 999%, 275%, and 117% the past four quarters. Sales growth during the past eight months has been strong with gains of 85%, 3%, -8%, 43%, 78%, 62%, 83%, and 52%. These numbers should continue to do well as 2012 and 2013 annual EPS estimates are for gains of 275% and 42% respectively.
InvenSense has 0% debt to shareholder equity, a cash flow of $0.14 per share, a return on equity of 20%, and spends 16.4% of sales on R&D. The current P/E ratio is at the high end of its short historical range of 17-52 at a current 50. While this may seem expensive, the P/E ratio was "high" when it broke out at $12. That obviously was a non-issue as the stock currently trades at $20.
There are 84 mutual funds invested in InvenSense owning 16% of the float. Management only owns 15% of the shares outstanding and while that is not anything great it is better than 0% ownership.
The last one is the most controversial one of the bunch. LinkedIn (LNKD). LinkedIn is a Mountain View, CA provider of a social networking platform enabling members to share their professional identity online via LinkedIn.com.
LinkedIn has impressive EPS growth with gains of 233%, 600%, 700%, 600%, 50%, 43%, 0%, and 140% the past eight quarters. Sales growth is just as exciting with gains of 92%, 98%, 107%, 108%, 110%, 120%, 126%, and 105% the past eight quarters. There is no sign of this growth slowing down as 2012 and 2013 annual EPS estimates are for gains of 74% and 77% respectively.
LinkedIn has 0% debt to shareholder equity, a cash flow of $0.75 a share, a return on equity of 11%, and spends an impressive 25.3% of sales on R&D. The P/E ratio is a very high 272 which is in the middle area of its short historical range of 165-454. While a P/E ratio of 272 seems high I can remember another stock that had a near-300 P/E ratio right after it became public. That stock was Salesforce.com (CRM). Salesforce.com is only up about 800% since going public with that "high" P/E ratio.
Mutual fund ownership has exploded the past two quarters from 186 to 314 funds. These mutual funds now own 54% of the float. The biggest problem I have with this stock is management ownership. Management only owns 1% of the shares outstanding. Normally, I am happy if I see at least 10%. So this is a bit of a disappointment.
There is no doubt that these stocks have some amazing growth. Long-term investors should definitely do more research to determine which stock or stocks deserve their capital. All stocks mentioned here have what it takes to be much higher by this time next year, as long as the market remains in an uptrend.
If the market enters a bear market, you can be sure these four stocks will not do well. However, if the market continues to move higher, these stocks have what is necessary to outperform the indexes by a wide margin.
My personal trading style is a trend following methodology and the way I operate in these stocks will be completely different than a longer-term investors buy and hold approach.
I am currently long Tangoe but I do not have the size that I want. Tangoe is currently in a well-formed consolidation pattern. If Tangoe can breakout to new March highs on strong volume, I will look to add to my current position.
Fusion-io is currently in a large consolidation pattern from November. A breakout to new March highs on strong volume would be my signal to get long Fusion-io.
InvenSense is a bit too volatile for me right now. The most recent breakout was too V-shaped on the price chart. Therefore, I will have to wait for a low volume pullback that is then followed by a higher volume breakout to get long this stock.
LinkedIn is also in my portfolio but it is a very tiny position and I want a lot more. I completely messed up on the long signal produced March 8th, as my internal technical indicators did not confirm the move in price. If LinkedIn can breakout to new March highs on strong volume, I will be going long this stock no matter what my internal technical indicators say.
How will I know when I am wrong on these trades? If I lose money. If they do not move higher immediately, I am out. It is that simple. I don't hold on to losers. I only hold winners.