This past weekend I found myself watching cartoons. Honestly, it
wasn't my choice. The kids had the remote. (But I do think it might
be a good idea for all of us to have some "silly time" once in a
while.) While watching Bugs Bunny (Bugs and the gang are OK, but
I'm more of a Winnie-the-Pooh fan -- I always admired the ways of
that Zen Master), I had the treat of catching my favorite Bugs
line: "Hot buttered popcorn. Get it while it's hot. Get it while
it's buttered." So I've spent the last few days trying to get that
mantra out of my head, while contemplating the state of the stock
market. But there just might be a connection to be made. Since late
December the market's been fairly hot. But I feel the last week or
so has also been a little buttery.
What does a buttery market look like, you ask? Well, for one
thing, it's enticing; but there's also a degree of uncertainty.
It's a little on the heavy side, and may cause investors to pause
(they're thinking, "sounds fantastic, but is this really the best
thing for my portfolio/waistline?"). In fact, I think this
environment could easily be coined a "hot buttered market" and,
since I like to buy on drops or pauses, offers a great buying
opportunity for the right stocks.
In my previous article, I focused on a long term strategy and
outlined 12 stocks for 2012. Today we'll focus on a shorter term
approach and look for stocks that offer great opportunities for
profits over the next three months or so. These stocks should make
a good short-list of candidates from which you could do further
research to determine if they're a good fit for your portfolio.
I put together a stock screen using our research and testing
software (Research Wizard) focusing on momentum ideas since "the
trend is your friend" is one of the market axioms that holds
true.
In this screen, I began with any stock with a Zacks Rank less
than or equal to 3. The reason for this is that research has shown
that any stock with a Zacks Rank of 4 or 5 definitively
underperforms the market. I'm also requiring the average broker
rating for a stock to be at least a "Buy". Since I think it's a
good idea to look at many pieces of a puzzle, a Buy broker rating
is a good confirmation. From there I looked for stocks whose
Price-to-Sales ratio is at or below industry peers. That means the
stock is a good value relative to other stocks in its industry.
Finally, I decided to keep only those stocks that experienced
increasing trading volume in each of the past four weeks and that
had the best percentage price changes over the last year and last
quarter. It's considered a bullish sign when both a stock's trading
volume and price are increasing. This signals increased demand for
a stock; and when something is in demand, its price goes up.
Testing a strategy made up of these components resulted in an
average compounded annual return of 34.4% from 2000 – 2011. That's
significantly higher than the S&P 500's 0.4% per year over that
same period. That's a huge difference and I don't have to spell out
the bigger difference that makes when compounded every year for
eleven years. Although, I will. If you invested $10,000 in the
S&P 500 at the beginning of 2000, you'd have $10,487 at the end
of 2011. If you followed the strategy in this article, you'd have
$354,513. That's the difference between buying your family a few
nice dinners over eleven years and buying your family a nicer
house.
I also looked at the risk profile of this strategy and,
surprisingly, the average losing stretch was 1.6 weeks for the
strategy and 1.8 weeks for the S&P 500. The worst stretch was a
6-week period for the strategy and an 8-week period for the S&P
500. Finally, the max drawdown was -35.1% for the strategy and
-54.7 for the S&P 500. So not only could you have had much
higher profits, you would have lost less during those down periods
by investing in this strategy.
Here's a method for finding stocks with good ratings and
increasing volume on increasing prices all with a dash of
value:
- First, start with only US common stocks.
- Next, create a liquid, investible set of the stocks with the
largest 3000 market values and average daily trading volume
greater than or equal to to 100,000 shares (if there's not
enough liquidity, it'll be hard for you to trade it).
- Add two other filters by selecting those stocks with a Zacks
Rank less than or equal to 3 and at least a Buy on average broker
rating. (Let's stick with only the best or moderately rated
stocks.)
- Select only those stocks with increasing trading volume in
each of the past four weeks. (Increasing trading volume coupled
with increasing prices indicates buying demand.)
- Select only those stocks with a price-to-sales ratio equal
to or lower than the industry median. (Lower means you want to
pay less per unit of company revenue compared to industry
peers.)
- Choose only the top 20 stocks with the best 52 week price
change. (We're looking for winning stocks over the last
year.)
- Pick the 5 with the best price change over the last 12
weeks. (We also want them to be doing well over the last 3
months.)
Here are 5 stocks to buy now, using this methodology
(1/27/12):
FEIC – FEI Company
FEI is a leader in the design, manufacture, sale and service of
products based on focused charged particle beam technology. This
technology allows the company's equipment to provide 3D imaging for
various industries including shale gas exploration and structural
biology research. Earnings at this company soared in 2011 and look
to continue into 2012 as analysts have been increasing their
earnings projections. The price of this stock also looks relatively
inexpensive compared to industry peers. This company is a Strong
Buy on Zacks Rank and brokerage analysts as well.
NEWP – Newport Corporation
Newport, an Irvine, California-based company, is a global
supplier of high-precision test, measurement and automation systems
and subsystems that enable manufacturers of fiber optic components,
semiconductor capital equipment, industrial metrology and aerospace
to automate their manufacturing processes, enhance product
performance and improve manufacturing. This company has an average
broker rating of a "Buy" and its stock price remains attractive
based on a 1.3 Price/Sales ratio even considering its recent run
up.
VOXX – VOXX International Corporation
This Long Island-based company blew away earnings expectations
in the most recent quarter and experienced solid margin increases.
The company is also highly rated among Wall Street brokers and the
Zacks Rank as well. The stock price of this retailer has been
jumping, yet remains an excellent value based on its Price/Sales
ratio. VOXX engages in marketing automobile sound, vehicle
security, mobile video systems and consumer electronic
products.
PRX – Par Pharmaceutical Companies Inc.
Par Pharmaceutical develops, manufactures and markets generic
pharmaceuticals. This company is highly favored by Street analysts
with its Strong Buy average rating. The company has had a string of
earnings surprises and estimate upward revisions that attribute to
its "Buy" Zacks Rank. The stock of this company has seen a recent
surge in price, yet still remains a good value based on any
valuation metric. So far in 2012, PRX has outperformed the industry
average by 6%, yet still has a P/S just under half the industry
average. Clearly there's more room for the stock price to run.
CPWM – Cost Plus, Inc.
Cost Plus is a leading specialty retailer of casual home
furnishings and entertaining products. The stock of this company is
up 20% year-to-date relative to its peers and still has a P/S of
roughly half its industry. The company recently reported a 7.4%
revenue increase over the holiday season. As a result of the
improved holiday sales, the company guided earnings higher. As a
Zacks Rank Strong Buy, could this stock be poised for another 25%+
price increase in the coming months? Seems likely.
So take a look at these five stocks and see which ones are a
good fit for your investment philosophy. If you'd like to do
additional research, I encourage you to click here to learn more
about the screening and backtesting power of a stock research
system built for the individual investor.
To conclude, I'll leave you with a quote from Zen Master Pooh:
"Sometimes, if you stand on the bottom rail of a bridge and lean
over to watch the river slipping slowly away beneath you, you will
suddenly know everything there is to be known."
COST PLUS INC (CPWM): Free Stock Analysis Report
FEI COMPANY (FEIC): Free Stock Analysis Report
NEWPORT CORP (NEWP): Free Stock Analysis Report
PAR PHARMA COS (PRX): Free Stock Analysis Report
VOXX INTL CP (VOXX): Free Stock Analysis Report
To read this article on Zacks.com click here.
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