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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."