By Timothy Lutts
One great way to find high-potential stocks is to look for breakouts to new highs right after a market correction,
So last week I did just that, two days after the Dow scared the pants off many investors by dropping 200 points in a day … in the process causing shares to shift from “weak” hands to “strong” hands.
And I found six stocks worth writing about, stocks that are clearly under accumulation by growth-oriented investors.
The most popular of the six among institutional investors—a rough proxy for risk—is Intuitive Surgical (ISRG), the manufacturer of robotic surgery systems that’s become a very dependable source of growth, thanks to both increasing global market penetration and recurring income from disposables used in operations. In the latest quarter, revenues grew 28% to $499 million, while earnings grew 24% to $3.75 per share. After-tax profit margins are a fat 30.4%. Since the breakout, however, ISRG has been the weakest of the six stocks, falling back below its breakout level to its 25-day moving average.
Only slightly less popular is Chipotle Mexican Grill (CMG), which has grown revenues and earnings every year of the past decade by opening more restaurants. In the latest quarter, revenues grew 24% to $597 million, while earnings grew 23%. After-tax profit margins were 9.6%, which is great for a restaurant chain. After the breakout, CMG climbed even higher, and it pulled back normally today.
Next comes Tractor Supply Company (TSCO), the Home Depot for rural Americans. Like Chipotle, it grows by simply opening more stores. And, again like Chipotle, it has modest after-tax profit margins, in this case 5.7%. Tractor Supply is the slowest-growing of the six stocks (by revenues); its $1.24 billion in revenues in the latest quarter reflected growth of “just” 20%. But earnings were up an impressive 43% to $0.96 per share! And since the powerful high-volume breakout, TSCO has been holding very tightly in the 98 area, giving little ground.
Moving up the risk scale substantially, we find Liquidity Services (LQDT), a company that runs online auction sites for used and returned merchandise. Not only does it get inventory from seven of the top 10 retailers, more than 30% of its revenues last year came from selling stuff for the U.S. Department of Defense! In the latest quarter, revenues surged 41% to $106 million and earnings rocketed 85% to $0.35 per share. After-tax profit margins were a robust 11.2%. Since the breakout, the stock has climbed higher and higher to hit a new peak today.
Next is a company that came public last October, Ubiquiti Networks (UBNT). The company, located in California, makes high-throughput radio-frequency telecom equipment, which is in great demand in emerging markets because it’s cheaper to install than fiber-optic equipment and cable. In the latest quarter, revenues mushroomed 95% to $87.8 million, while earnings zoomed 145% to $0.27 per share. After-tax profit margins were a fat 28.4%. Since the breakout, UBNT has climbed even higher.
Finally, there’s a little company that’s familiar to most Americans who feed (or have fed) children. It’s Annie’s, the maker of macaroni and cheese and much more. The stock’s symbol, appropriately, is BNNY. In the latest quarter, revenues grew 25% to $30.8 million, while earnings grew 8% to $0.13 per share. After-tax profit margins were 7.2%. Admittedly, the company’s growth is not that rapid, but I rate it riskiest because the stock is so young; it just came public March 28. Since the breakout, the stock has climbed higher, and it pulled back today.
Now, if you look into these stocks, you’ll notice that the first two are very high-priced, trading above $500 and $400 a share, respectively. But that’s no reason to avoid them! That’s simply a sign that the stocks—and management—have been successful in the past. So it you invest in these stocks, just buy fewer shares.
Finally, there’s the question of valuation. Some investors, presented with a list of stocks like this, will compare valuations, looking to buy the stock with the lowest PE ratio or lowest price to book value. I used to do that long ago too.
But then I learned that if you’re investing in growth stocks, and your goal is big profits, valuations are worthless. The poster-boy for that lesson was Amazon.com (AMZN) whose founder Jeff Bezos famously pronounced that his first goal was to make Amazon.com big fast, and to worry about profits later. Skeptics predicted he would never make money, but Bezos sure proved them wrong, and AMZN went on to become one of Cabot’s biggest winners, notching profits of more than 2,000%.