The recent earnings season has been exciting, with stocks gapping and running in both directions at quite an incredible pace. These powerful gaps in either direction have been providing investors, who purchase the gap at the open, with some very handsome gains by the end of the day.
On top of the initial day's move, many stocks continue to trend in the direction of their gap. Today, I want to focus on the long side by reviewing four stocks that are on my watchlist for near-term potential purchases, following their earnings surprises.
All of the stocks below gapped higher on very strong volume and are leading stocks relative to the overall stock market.
What is a leading stock? A leading stock has strong EPS growth, strong sales growth, a high profit margin, a high return on equity, low to zero debt to shareholder equity, mutual fund ownership growth, management ownership, high future EPS estimates, a high Relative Strength line to the overall market, and is within 15%-20% of its 52-week high.
All data below is provided by my premium data provider MarketSmith.
The first stock we will review is Cynosure, Inc. (NASDAQ:CYNO). Cynosure, Inc. is a Westford, MA, developer of aesthetic treatment systems for non-invasive hair removal, skin rejuvenation and vascular/pigmented lesions.
Cynosure, Inc.'s EPS have recently turned positive for the first time in almost four years, growing 233%, 147%, and 999% over the past three quarters. This turnaround in EPS is due to recent explosive sales growth. Sales have grown 6%, 16%, 16%, 23%, 48%, 53%, 56%, and 50% over the past eight quarters. These large gains are expected to continue into 2013, as annual EPS estimates are for a gain of 40% compared to a year ago.
Cynosure, Inc. has 0% debt to shareholder equity, a profit margin of 2.8%, a cash flow of $0.40 per share, and spends 9.1% of sales on R&D. The current P/E ratio of 84 is in the middle of its five-year range of 8-244.
Mutual fund ownership in Cynosure, Inc. wasn't going anywhere until the last two reported quarters. Mutual fund ownership has increased from 113 to 142 funds during the past three quarters. Management owns a healthy 9% of the shares outstanding.
Next, we have a stock I recently reviewed not too long ago. Fleetcor Technologies, Inc. (NYSE:FLT) is a Norcross, GA, global provider of specialized payment products and services to commercial fleets, oil companies, and petroleum marketers.
Fleetcor Technologies, Inc.'s EPS growth is steady, growing 27%, 74%, 21%, 36%, 19%, 4%, 28%, and 28% over the past eight quarters. Sales growth is just as smooth, growing 11%, 9%, 7%, 20%, 20%, 32%, 32% and 28% during the same period. 2012 and 2013 annual EPS estimates are for gains of 27% and 13%, compared to the year earlier.
Fleetcor Technologies, Inc. has 34% debt to shareholder equity, a return on equity of 25%, a profit margin of 29.5%, a cash flow of $2.36 per share, and an annual EPS growth rate of 30%. The current P/E ratio of 16 is in the middle of its historical range of 11-19.
Mutual fund ownership continued to increase every single quarter for the past seven quarters, growing from 94 to 241 funds owning the stock. Management still owns a whopping 38% of the shares outstanding. This high level of ownership shows that management is vested in making sure the stock price appreciates higher.
Next, let's take a look at a giant in the cloud-computing space, Rackspace Hosting, Inc. (NYSE:RAX). Rackspace Hosting, Inc. is a San Antonio, TX, corporation that offers various types of managed hosting services to businesses, support websites, web-based IT systems and computing.
Rackspace Hosting, Inc.'s EPS growth is explosive, growing 50%, 43%, 43%, 63%, 56%, 80%, 70%, and 38% the past eight quarters. Leading this charge in EPS has been sales, growing 23%, 27%, 29%, 32%, 32%, 32%, 31%, and 29% during the same period. This huge growth looks like it will continue well into the future, as 2012 and 2013 annual EPS estimates are for gains of 36% and 47% respectively.
Rackspace Hosting, Inc. has 12% debt to shareholder equity, a return on equity of 15%, a profit margin of 7.99%, a cash flow of $2.06 per share, and an annual EPS growth rate of 35%. The P/E ratio of 80 is in the high end of its historical range of 21-117. However, savvy investors understand that a high P/E ratio is not necessarily a negative when it comes to growth stocks with explosive growth.
Mutual funds clearly don't mind the higher P/E ratio as fund ownership has grown from 342 to 543 funds the past eight quarters. Management clearly isn't worried either and expects bigger growth as they still own 22% of the shares outstanding.
Finally, we will end off with a stock that has only recently shown up in my earnings winners scan during the past two quarters, DigitalGlobe, Inc. (NYSE:DGI). DigitalGlobe, Inc. is a Longmont, CO, provider of commercial high-resolution earth imagery products to intelligence/defense and commercial markets.
DigitalGlobe, Inc.'s EPS has recently exploded, growing 100%, 900%, 367%, and 999%+ over the past four quarters. Sales have grown 12%, 15%, 0%, 2%, 17%, 12%, and 23% over the past eight quarters. This recent rapid growth is expected to continue into the near-term future, with 2012 and 2013 annual EPS estimates for gains of 788% and 46%, respectively.
DigitalGlobe, Inc. has 99% debt to shareholder equity, a return on equity of 1%, and a cash flow of $0.39 per share. The P/E ratio is currently at 49, which is in the low end of its historical range of 14-821.
Mutual fund ownership has actually decreased over the past eight quarters. However, this huge growth in EPS has only recently started, and with future EPS estimates so high, you can be sure mutual funds will accumulate shares. During the past two quarters, the growth has already started, growing from 208 to 218 funds. Management still owns 4%, which isn't anything special, but some ownership is better than zero ownership.
All of the stocks above are of superior quality in regards to their fundamentals and technicals, and future earnings-related rallies are bound to continue—as long as growth continues. Long-term investors that accumulate a position in any of the stocks discussed above might want to reassess their ownership if we start to see EPS and sales decline dramatically or you see back-to-back quarters of negative EPS and sales growth.
I am personally a trend-following investor and only want to be long these stocks as they move higher. Currently, all are moving higher so I can begin to start my operation in accumulating shares in the companies listed above.
Cynosure, Inc. is the only company that has put in enough time consolidating the recent gains to be a possible long in the short term. A breakout to a new 52-week high is where I will begin my operation. As long as the stock continues to move higher, I will look to add to my position with subsequent pocket pivot point buy signals off the 10-day moving average.
Fleetcor Technologies, Inc., Rackspace Hosting, Inc., and DigitalGlobe, Inc. all need to consolidate their most recent gains for at least five market sessions. That is the minimum time I will allow. I will not chase price. A move above the resistance levels of their basing period will be what triggers my first buy signal on these stocks. Just like with Cynosure, Inc., subsequent pocket pivot point buy signals off the 10-day moving average is where I will add to my positions.
If any of the stocks I purchase do not move up immediately and instead show me losses, I will quickly cut my losses short and wait for a better entry signal. It is important to remember that in the stock market, if you do not cut your losses short, eventually you will take the ultimate loss.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CYNO over the next 72 hours.