The stock market recently suffered some heavy rounds of distribution. Despite this, last week the market reclaimed the 50 day moving average on all indexes and immediately followed through on those gains on Thursday and Friday. Volume was suspect on the latest move higher, however, that has been the case during uptrends in this post-2008 QE stock market environment.
The best part about the recent rally is the fact that high quality stocks with strong EPS and sales growth are outperforming the market on a Relative Strength basis.
There were earnings breakouts in stocks like eBay (EBAY), SolarWinds (SWI), Equinix (EQIX), Stamps.com (STMP), and Cirrus Logic (CRUS). There were breakouts from sound long consolidation patterns like Susser Holdings (SUSS), PROS Holdings (PRO), Seacube Container Leasing Ltd. (BOX), and ValueClick (VCLK).
Along with last week's round of breakouts, there are many stocks currently forming solid consolidation patterns near all-time highs. As long as the stock market remains in an uptrend, these stocks should be the next round of breakouts. On the other hand, if the market begins to selloff, all bets are off the table as 3 out of 4 stocks follow the general direction of the stock market.
130 years of stock market research has shown that the fundamentals we are going over below are key when it comes to selecting the best stocks with the best chances of big price appreciation. Let's take a look at the fundamentals in four leading stocks that I am watching for potential longs. Afterwards, I will go over my personal game strategy for purchasing these leaders.
These four stocks are being selected as potential longs as they are breaking out or nearing breakouts to new highs, and with their very strong fundamentals, they have the potential to produce big gains over the next few months.
The information below is provided by my premium data provider Marketsmith.
First up, a stock I have profiled before (here and here), Alexion Pharmaceuticals (ALXN). Alexion Pharmaceuticals is a Cheshire, CT developer of therapeutics to treat cancer, autoimmune disorders, transplant rejection, hematologic and neurologic diseases.
Alexion Pharmaceuticals EPS growth is on a tear, growing 33%, 32%, 63%, 53%, 45%, 48%, 58%, and 55% in the past eight quarters. Sales have been driving the earnings growth, growing 36%, 38%, 41%, 41%, 48%, 44%, 46%, and 47% during the past eight quarters. Annual EPS estimates for 2012 and 2013 are for gains of 30% and 42%.
Alexion Pharmaceuticals has 0% debt to shareholder equity, a cash flow of $1.53 per share, a return on equity of 27%, an EPS growth rate of 66%, and it spends 17.5% of sales on R&D. The P/E ratio is currently at 60, which is in the lower end of its 5-year range of 30-171. Mutual funds love the numbers above as fund ownership has increased from 690 to 1061 funds during the past eight quarters. Management still owns 4% of the shares outstanding. While this is not a great number, it is always good to see management vested in the company.
Next up, Lululemon Athletica (LULU). Lululemon Athletica is a Vancouver, BC operator / franchiser of 137 athletic apparel stores in Northern America and Australia.
Lululemon Athletica's EPS growth has been hot, growing 180%, 114%, 80%, 60%, 57%, 73%, 50%, and 59% in the past eight quarters. Sales have been just as exciting, growing 69%, 56%, 56%, 53%, 35%, 39%, 31%, and 51% during the same period. This growth is expected to continue with 2013 and 2014 annual EPS estimates for gains of 29% and 28% respectively.
Lululemon Athletica carries 0% debt to shareholder equity, has a cash flow of $1.48 per shares, a return on equity of 37%, and an EPS growth rate of 68%. The current P/E ratio of 59 is in the lower half of the 5-year range of 7-190. Mutual funds are fans of Lululemon Athletica's financials, with fund ownership growing from 210 to 487 funds during the past eight quarters. Management still owns a healthy 11% of the shares outstanding, indicating they want to be invested in Lululemon Athletica's future.
Now let's take a look at an old company that continues to produce big growth. Union Pacific Corporation (UNP) is an Omaha, NE provider of rail transportation with 31,898 miles of Main and B Ranch line track across 23 states in the western U.S.
Union Pacific Corporation, despite being old as dirt, continues to grow EPS at an outstanding rate. EPS growth in the past eight quarters has increased 79%, 54%, 44%, 28%, 14%, 19%, 28%, and 39%. Sales growth has grown steadily over the same period at 27%, 20%, 17%, 13%, 16%, 16%, 16%, and 14%. The steady growth should continue throughout 2012 and 2013 as annual EPS estimates are for gains of 21% and 14% respectively.
Union Pacific Corporation has 47% debt to shareholder equity, an impressive cash flow of $10.23 per share, a return on equity of 18%, and an EPS growth rate of 16%. The current P/E ratio of 16 is in the middle of its 5-year range of 7-22.
Union Pacific Corporation has seen mutual fund ownership grow from 1679 funds eight quarters ago to 1865 today. Nice growth for a company around 80 years old. Management only owns 1% of the shares outstanding but this is extremely normal for a company where the big early growth has long been left in the past.
Last but not least, my personal favorite based on potential future growth-- F5 Networks (FFIV). F5 Networks is a Seattle, WA provider of optimization technology for delivery of network based applications of network resources.
F5 Networks' EPS growth is extremely strong, growing 65%, 58%, 69%, 57%, 47%, 34%, 17%, and 24% in the past eight quarters. Sales growth has been just as impressive, growing 46%, 45%, 41%, 35%, 26%, 24%, 20%, and 22% during the same period. This big growth is expected to continue with 2012 and 2013 annual EPS estimates for gains of 20% each year.
F5 Networks sports 0% debt to shareholder equity, a cash flow of $4.16 per share, a 29% return on equity, an EPS growth rate of 30%, and spends 12.1% of sales on R&D. The P/E ratio is in the middle of its 5-year range of 12-50 at a current 33.
Mutual fund ownership has grown every quarter in the past eight quarters, from 752 to 1208 funds invested in the stock. I was surprised to discover that management only owns 1% of the shares outstanding. Considering the potential growth in this area of the economy, that seems very low.
All of these stocks sport the proper growth in important fundamental areas that indicate future stock price appreciation is a given. However, we know things are not that simple in the stock market.
While the long-term looks great for these stocks, I am a trend follower. I only want to be long these stocks when they are moving higher. We know via 130 years of stock market history that stocks hitting new highs tend to go higher, while stocks hitting new lows go lower. All of the stocks above are less than 5% away from new all-time highs. I want to purchase these stocks as soon as they hit all-time highs. My buy stops are set and ready to execute.
The more volume behind the breakout to a new high, the better. However, volume is not really that important anymore in the post-2008 QE driven market environment. If the stocks hit all-time highs but do not move higher immediately with more price gains, I will cut my losses and wait for the next "real" move. The only way to survive in the stock market is to cut your losses when you are wrong. There is no other way to survive in the long run. If you do not cut your losses when you are wrong, you will one day suffer the ultimate final loss.
Additional disclosure: I may initiate a long position in ALXN and FFIV over the next 72 hours.