2 New Stocks Ready To Explode Higher

Includes: BSFT, FIO
by: Joshua Hayes

The stock market finally signaled a follow-through day on day 11 of its current rally attempt and while that is very late for a follow-through day it is still a legitimate move. Another problem with the follow-through day is that volume was below average. The low volume and late follow-through day on this rally attempt historically suggest that this rally will not last. Then again, there have been other late low-volume follow-through days that have started at least a short-term rally.

While you never know how a rally will play out one useful way to take stock of the current situation is to take a look at stocks that have strong growing fundamentals. Are these stocks creating sound bases? Are these stocks being accumulated (higher volume above the 50 day volume average)? If you find the answer to both of these questions are yes, then you have a much higher chance of having a rally that can produce significant gains.

Throughout this bear market I have written articles on stocks holding up the best amidst all the distribution. Most of the stocks I have written about the past two months continue to be accumulated and are just waiting for the market to take off. Tonight, there are two more incredible growth story new issues that I want to bring to investors attention. The growth and potential capital gains from these two stocks can not go unnoticed.

The first stock we will look at is Broadsoft (NASDAQ:BSFT). Broadsoft is a Gaithersburg, MD provider of software for fixed line, mobile, and cable service providers for delivery of voice and multimedia services. The company is simply a monster growth stock in its Telecom-Infrastructure group. No other stock in this group can compare with the numbers this company is generating.

Sequential EPS growth the past eight quarters has been an outstanding 111%, 500%, 0%, 0%, 300%, 999%+, 300%, and 999%+. Sales growth, during the same time frame, has been stunning with gains of 35%, 6%, 30%, 12%, 22%, 85%, 86%, and 63%. The growth is expected to continue into the near term future with 2011 and 2012 annual EPS estimates of 100% and 20% respectively.

The company only has 2% debt to shareholder equity, a cash flow of $0.60, and spends 20.5% of its revenue on R&D. Spending 20.5% of revenue on R&D shows the company is going to continue to stay on the cutting edge of its technology and do its best to make shareholders happy.

These beautiful numbers above is the reason Broadsoft’s mutual fund sponsorship has improved from 41 funds five quarters ago to 261 today. These mutual funds own 85% of the float. It’s unfortunate management is not as hungry for the stock as they only own 8% of the shares outstanding. Normally, for a newer issue, you would like to see them have more of a vested interest in future profits but the fundamentals are so good on Broadsoft that it doesn’t matter to me that management owns so little.

The P/E ratio for Broadsoft is 38 and is in the lower end of the five-year historical range of 21-83. However, as I state in every article I write, the P/E ratio does not matter at all to the savvy investor class. P/E ratios have no historical track record of being able to be used to find the most explosive capital creating stocks in each bull cycle.

The second stock is Fusion-Io (NYSE:FIO). Fusion-Io is a Salt Lake City, UT developer of a storage memory platform for data decentralization enabling customers to improve processing capabilities. This stock’s growth is beyond phenomenal.

EPS growth has just turned a corner from negative to positive with the last two quarters producing sequential gains of 213% and 167%. The more impressive numbers are on the sales side where sales have gone from $4.8 million to $71.7 million the past eight quarters. The growth the past eight quarter is stunning with gains of 122%, 231%, 705%, 162%, 465%, 337%, 403%, and 556%. The near term future looks even brighter with 2011 and 2012 estimated annual EPS gains of 89% and 94% respectively.

The company carries 0% debt to shareholder equity, sports a 7% return on equity, has a cash flow of $0.14, and spends 13.8% on R&D.

The growth above is the reason management owns 56% of the shares outstanding. Not only are they vested to capitalize on this company’s growth but mutual funds have already taken notice with 116 funds placing their investment capital into the stock.

The P/E ratio crowd will hate the number Fusion-Io carries. Fusion-Io currently has a 283 P/E ratio which is in the midpoint of the 166-411 range its seen during its existence. Does this high P/E ratio bother me? Not at all. In fact I prefer it. It will make sure only the smartest of growth investors play this stock.

While the fundamentals of both companies are fantastic and the urge is strong to buy them now I still would never do that. The historically intelligent way to play these fundamental powerhouses is to rely on the technicals to tell you when to buy. If this market can continue to move higher I will be looking to enter Fusion-Io and Broadsoft based on historically proven high reward/low risk patterns.

If Fusion-Io and Broadsoft setup in a base lasting at least five weeks with volume being quiet in the base which is followed by a breakout on strong volume I will be more than happy to put my capital to work. Other buy points or points where I would scale into my positions would be with a heavy volume pocket-pivot point buy signal off the 10-day moving average or a high volume bounce off the 50 day moving average that was preceded by a low volume pullback.

The best stocks in stock market uptrends sport strong EPS and sales growth and have sound technical patterns. Fusion-Io and Broadsoft are both off to a great start. The future looks very bright for those that invest with these two companies.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FIO, BSFT over the next 72 hours.

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