Will These 2012 High Fliers Continue To Soar?

by: David Alton Clark

The first quarter of 2012 was the best first quarter in 14 years. The Dow is up 8% for the quarter. The S&P 500 is up 12% since the start of the year. The Nasdaq has outpaced them all, up 18.6% for the quarter. Both the Dow and S&P logged their best quarterly gain in 14 years. The Nasdaq posted its best quarterly performance since 1991. The quarter has been drastically different from 2011. It has been a paradise for stock pickers with low volatility and low correlation producing outstanding gains. In this article we will analyze the strongest performing S&P 500 large cap stocks for the first quarter of 2012.

Bank of America (BAC) is up the most with a gain of 72.43%. The entire financial sector has been on fire since most passed the recent Federal Reserve stress tests. I took profits recently on my Bank of America position and am looking for an opportunity to get back in on any dip. BAC has much more room to run due to the fact it is still trading at approximately half its book value. I don't think the rally is over for the banks. Nevertheless, this stock has almost doubled in a quarters time and I am expecting a pullback below $9 prior to the next upward move.

Salesforce.com (CRM) ranks second with a gain of 51.20% for the quarter. Look up the word charisma in the dictionary and you will find a picture of Marc Benioff, CRM's CEO. With Benioff at the helm, Salesforce.com has matured from a revolutionary into a trailblazer in enterprise cloud computing. Salesforce.com recently reported strong fourth quarter earnings and first-quarter 2012 guidance. Salesforce.com significantly beat analysts' estimates and gave strong guidance going forward.

Salesforce has its detractors who see the stock's valuation as outlandish with a forward P/E of 74. Salesforce's valuation is sky high, there is no doubt. But that only reflects the fact that Salesforce's prospects are sky high as well. With Benioff at the helm and a billion dollars of deferred revenue backlog, I perceive a silver lining in this cloud play. Salesforce appears to be capable of maintaining their momentum and are just beginning to pierce the envelope of the cloud market's massive potential. Salesforce recently signed its first 9 digit contract, according to Benioff. Chatter, Salesforce's social networking product for the workplace that customers usually get for free, could help boost Salesforce's top line, as an entryway for the sales automation software company to sell its other products and services, according to an article in Barron's.

Priceline.com Incorporated (PCLN) is next with a 50.74% gain for the quarter. Barclays recently raised its target price on Priceline.com to $800 from $725, stating Priceline's European market potential deserves a premium multiple vs. other internet companies. Priceline performs "extremely well in Europe" and has a "very robust growth runway ahead in Europe", the firm says, plus any European short-term stability would give shares "a strong chance to outperform." Nevertheless, some believe Priceline has become too expensive at these levels. With earnings expectations of $31.22/share for current fiscal year and $38.31 for next year, Priceline's forward P/E ratios are somewhat rich at 22.9 and 18.7, respectively.

Apple Inc. (AAPL) is up 47.99% for the year to date. Apple has exploded higher recently with the release of the New iPad and a recent announcement of a dividend. The largest company in the world has the potential to become a dividend growth play going forward. The introduction of the iPhone 5 presumed to be just around the corner, and the stock should see some well-deserved multiple expansion. Apple has broken out of its recent trading channel significantly as of late. Many technicians are predicting a significant retracement based on this parabolic move. Nevertheless, I must disagree and history is on my side. If you review the history of the stock you will see this same movement has occurred 12 times previously and maintained the increased price level 9 of the 12 times. These are pretty good odds Apple will be able to sustain the current price increase.

Red Hat (RHT) rounds out the group with a 44% gain for the year. Red Hat is currently trading at multi-year highs following its FQ4 beat, strong fiscal year 2013 guidance and newly announced stock buyback plan. Bank of America recently upgraded the stock. BAC sees Red Hat benefiting from the conversion of free Linux users to paid subscribers, rising selling prices, the cross-selling of its JBoss middleware, growing virtualization software sales, and expansion into new vertical markets. Red Hat recently spiked significantly based on its latest earnings report. I would definitely wait for the stock to cool off some prior to starting a position.


I continuously monitor the list of best performing stocks to identify potential momentum plays. It may seem obvious to simply jump on these juggernauts and enjoy the ride ... If only it were that simple.

Many questions need to be answered before putting assets at risk. Have we missed the move completely or is this the first leg of an extended rally? Should we wait for the steam to evaporate and the stock to simmer down before opening a position? After parabolic moves, most stocks rest or retreat up to 10% or more before continuing upward (If they ever do). Has the stock run into the stratosphere and exhibiting bubble like characteristics? This leaves us with quite a conundrum. We all know that past performance is not a sure-fire indicator of future success. On the other hand, these stocks are performing extremely well and could provide substantial returns.

It's easy to feel like you have missed out when you see a stock up over 50% for the quarter. Typically, if a stock has run up significantly in a short time, it increases the odds of the stock correcting in the near-term considerably. Nonetheless, we have all seen the performance of stocks the likes of Priceline, Apple and Amazon (AMZN), which have shot up more than 10 fold in recent years. One of the greatest stock returns of all time was Warren Buffett's purchase of a stake in the Washington Post Company (WPO). This one investment subsequently provided Buffett with more than a hundred fold return.

I will continue monitoring these stocks further to determine the precise timing to create a position. They all seem well positioned to benefit from each of their respective sector's burgeoning demands spurred by numerous positive catalysts.

Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses. Additionally, I would suggest buying a basket of these high fliers rather than just one, based on the speculative natural of investing in stocks with such recent significant moves.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RHT, AAPL, CRM, BAC, PCLN over the next 72 hours.