The stock market has been in a sloppy and very volatile uptrend since the October lows. As time has moved on many stocks have set up in bullish patterns that suggest further price appreciation is ahead.
130 years of stock market history proves that the best stocks year after year show two similar traits year in and year out. First, they all have explosive earnings and sales growth. Second, they show Relative Strength to the overall stock market before they begin their major price advances.
Some of the biggest gains come from new issues. When you have a new issue go public with strong fundamentals, and then get a stock market uptrend to go with it, odds are in your favor that serious price appreciation is in the near future.
Lets take a look at two oil related new issues with strong fundamentals.
First up, C&J Energy Services (CJES). C&J Energy Services is a Houston, TX provider of hydraulic fracturing and coiled tubing services with focus on complex well completion in Texas, Louisiana, and Oklahoma.
EPS gains for C&J Energy Services has exploded the past seven quarters, gaining 600%, 500%, 999%, 999%, 999%, 999%, and 207% . Sales growth has been just as impressive, gaining 7%, 95%, 149%, 401%, 412%, 290%, 336%, and 173% the past eight quarters. Annual EPS estimates for 2011 and 2012 are for gains of 369% and 33% respectively.
C&J Services sports a debt to shareholder equity ratio of 41%, a cash flow of $0.84, and a return on equity of 37%. The P/E ratio is currently in between its range of 5-13 at a current 8. However, P/E ratios, via 130 years of researching the best stocks every year, have zero influence on finding the best stocks with the potential for huge gains.
The stock might be brand new but 145 mutual funds already like what they see. With the current numbers this company is producing, I am sure we will see more mutual funds join the ranks. Management owns 17% of the shares outstanding. It is always good to see management have a vested interest in their company’s stock.
Next, Tesoro Logistics (TLLP). Tesoro Logistics is a San Antonio, TX Master Limited Partnership provider of crude oil transportation services through a gathering system in the Bakken shale and Williston basin.
After losing money for years, Tesoro Logistics has finally turned the corner with EPS gains of 210% and 345% the past two quarters compared to the year earlier. Sales growth has exploded the past two quarters following weak gains the prior six quarters. Sales have grown 0%, 7%, -11%, 12%, 4%, 6%, 302%, and 340% the past eight quarters. 2012 annual EPS estimates are expected to be 82% higher.
Tesoro Logistics debt to shareholder equity is 0% but the cash flow is a $-0.84. The current P/E ratio of 74 is in the high end of its historical range of 51-78 so it is definitely expensive to value investors. However, momentum seems to be more important at the moment.
Mutual fund ownership has actually fallen from 46 funds last quarter to 32 funds today. Clearly, mutual funds leaving has not been a problem, as the stock has risen 40% the past two months. A troubling sign, however, is that management only owns 1% of the shares outstanding. The best stocks that show the biggest price gains normally have much higher management ownership when they go public.
When hunting for the best stocks to buy, during a market uptrend, top notch fundamentals with big growth is the most important factor. However, buying a stock based on fundamentals alone is foolish at best. To put the odds best in our favor we need technical analysis.
C&J Energy Services is currently breaking out of a very well formed cup pattern on very strong accumulation (volume well above the 50 day volume average). The stock may be purchased here with a final cut loss with a move below Thursday or Friday’s lows. If the stock continues to advance, further purchases can be made on subsequent base breakouts and/or at the 10-day moving average if the stock bounces off the line on heavy volume.
Tesoro Logistics, just like a recent oil related new issue Chesapeake Granit Wash Trust (NYSE:CHKR), is in the middle of a very rapid price increase. For Tesoro Logistics to become a long, I need the stock to calm down. It needs to create another base and breakout of that base on strong volume, to become a new position. Another possible entry area is a bounce off the 10-day moving average line on very strong volume following a lower volume pullback.
Once these stocks are purchased, they need to work immediately or else I will cut my loss and move on. The greatest traders currently and of all-time do not hold on to losing positions. If I buy these stocks and they do not move higher immediately, I will cut my losses and wait for another entry signal.
Disclosure: I am long CJES.