Every investor wants a stock that does nothing but go straight up. Unfortunately, this rarely ever happens. Most stocks will stop, pause, and build consolidation patterns before moving higher, in a general market uptrend.
When it comes to top quality stocks with huge growth in their fundamentals, these consolidation patterns give traders a chance to get long, before a stock goes on to new highs.
While some traders will wait for a breakout to new highs, savvy individuals can sometimes get a feel for when the base building process is ending. These investors will begin accumulating shares early, before the breakout to new highs, allowing them a better overall reward to risk ratio.
Today, I want to review four leading stocks I have put on my short-term buy watchlist, as they consolidate their recent gains. Afterwards, I will explain where I will purchase these leading stocks.
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 information below is provided by my premium data provider MarketSmith.
Let's start it off with a stock that a lot of people are familiar with. Salesforce.com (CRM). Salesforce.com is a San Francisco, CA provider of on-demand customer relationship management software applications and services to businesses worldwide.
Salesforce.com's EPS growth is starting to pick up steam, once again, growing 17%, 6%, 39%, 32%, and 24% the past five quarters. Driving the growth in earnings has been sales. Sales have grown 25%, 30%, 29%, 34%, 38%, 36%, 38%, 38%, and 34% the past nine quarters. This growth will continue into the near-future, with 2013 and 2014 annual EPS estimates expecting gains of 6% and 34% respectively.
Salesforce.com has 3% debt to shareholder equity, a return on equity of 14%, a cash flow of $2.88 per share, an annual EPS growth rate of 78%, and spends 13% of its sales on R&D. The P/E ratio is currently at 94 in the lower end of its 5-year range of 52-655.
Mutual fund growth continues to increase, growing from 1078 to 1236 funds the past eight quarters. Management still owns 9% of the shares outstanding but that number will continue to drop as they steadily (almost daily) distribute shares into the market.
Moving on to an unfamiliar name, we have Ensco Plc (ESV). Ensco Plc is a United Kingdom company providing offshore contract drilling services in Europe, Africa, Asia Pacific, Americas and Australia.
Ensco Plc's EPS growth has recently turned around back into growth mode, growing 16%, 127%, and 99% the past three quarters. Spurring this turnaround has been sales, growing 37%, 114%, 145%, 184%, and 90% the past five quarters. 2012 and 2013 annual EPS estimates are for gains of 60% and 31% respectively.
Ensco Plc has 45% debt to shareholder equity, a return on equity of 8%, a profit margin of 26%, a cash flow of $4.41 per share, and a dividend yield of 2.6%. The current P/E ratio of 13 is in the mid range of its 5-year range of 3-20.
Mutual fund ownership has fallen from 607 to 351 funds the past eight quarters. This number is concerning. However, it is clear, based on the price and volume action, that funds that remain are heavily accumulating these shares. Management only owns 1% of the shares outstanding but any ownership is better than zero ownership.
Next, we have Colfax Corporation (CFX). Colfax Corporation is a Fulton, MD manufacturer of fluid handling products for commercial marine, oil, gas, global Navy and power generation industries.
Colfax Corporation's EPS have grown 50%, 50%, 61%, 68%, 3%, 10%, and 21% the past seven quarters. Sales has grown 3%, 27%, 32%, 52%, 29%, 7%, 459%, and 460% the past eight quarters. That huge sales growth is expected to really help earnings next year. 2013 annual EPS estimates are for a gain of 46% versus a year ago.
Colfax Corporation has 54% debt to shareholder equity, a return on equity of 28%, a profit margin of 4%, a cash flow of $1.81 per share, an annual EPS growth rate of 11%, and spends 0.8% of sales on R&D. The P/E ratio of 24 is in the high end of its historical range of 4-29. However, savvy investors understand that a high P/E ratio is not necessarily bad when it comes to young growth stocks.
Mutual fund ownership has grown from 152 to 384 funds, during the past eight quarters. Management still owns 13% of the shares outstanding, wanting to be vested in the future growth of their own company.
We will end it off with an exciting Chinese company named QIHOO 360 Technology Co. Ltd. (QIHU). QIHOO 360 Technology Co. Ltd. is a Chinese operator of software distribution websites and developer of value-added services and anti-virus software.
QIHOO 360 Technology Co. Ltd.'s EPS is explosive, growing 100%, 400%, 600%, 267%, 300%, 567%, 320%, and 55% the past eight quarters. Sales are just as amazing, growing 54%, 98%, 136%, 176%, 207%, 214%, 202%, and 107% the past eight quarters. This extreme growth is expected to continue, with 2012 and 2013 annual EPS estimates expecting gains of 41% and 54% respectively.
QIHOO 360 Technology Co. Ltd. has 20% debt to shareholder equity, a profit margin of 24%, a cash flow of $0.08 per share, and annual EPS growth rate of 355%, and spends 42.5% of sales on R&D. The P/E ratio of 32 is in the low end of its historical range of 19-241.
Mutual fund ownership has grown from 59 to 96 funds, during the past five quarters. Management still owns a whopping 54% of the shares outstanding. Clearly, they expect much higher prices from their company's stock.
All of the stocks listed above make excellent investment options for longer-term focused growth investors. However, if any of the stocks above show back to back quarters of declining EPS and sales growth, the company should be further analyzed to make sure it still belongs in an individual's portfolio.
I am personally a trend following investor and thus only want to be long these stocks as they trend above their 50 and 200 day moving averages. Every stock is now doing this and all are on my short-term buy watchlist.
I am looking to purchase all of these stocks as they make pocket pivot point buy signals off the 10 day moving average. Ensco Plc produced this signal on 7/27. Unfortunately, Ensco Plc did not enter my screens until 7/30. The next pocket pivot point buy signal off the 10 day moving average by Ensco Plc, Colfax Corporation, and QIHOO 360 Technology Co. Ltd. is where I will begin accumulating shares.
Salesforce.com produced a pocket pivot point buy signal on Friday. Therefore, I will be initiating a starter position in Salesforce.com on Monday morning. Subsequent pocket pivot point buy signals off the 10 day moving average is where I will continue to add to my position in each of these stocks as long as they trend above their 50 and 200 day moving averages.
If any of these stocks trade below my cut loss level, after my initial purchase, I will not hesitate to cut my losses and re-evaluate the trade. In the stock market if you do not cut your losses short, eventually, one day, you will suffer the ultimate loss.
Additional disclosure: I am opening a starter position in CRM at the opening bell on Monday August 27, 2012.