Alan Brochstein identifies nine stocks that may be close to breaking out of consolidation patterns
There are many ways to look for new potential investment ideas, and, as a veteran blogger and market observer, I can testify that many like to focus on stocks near their lows. As someone who really appreciates the well-timed contrarian idea, I find myself looking for those “bargains” as well. The problem with bottom-fishing is that most stocks sitting near their lows actually are there for a reason. I actually think it’s a better use of my time to look for stocks trending higher, but that have consolidated while maintaining good momentum relative to the overall market.
Over the past couple of years that I have been contributing to the TK All-Star Blog, I have shared some screens on stocks that are breaking out, but it’s been a while. Given that the overall market has been in somewhat of a consolidation for the past 45 days or so, it could be an especially good time to look at potential breakouts.
Using Baseline, I wanted to run a screen for you focused on finding promising candidates to review more closely. In addition to identifying price behavior that signals a consolidation, I included some parameters that look at fundamentals and valuation. Here is what I did (and why):
- Stocks from the Russell 3000 index, with market cap > $500mm
- 1 month price return >3% (better than the market – some momentum)
- 3 month price return >8% (better than the market – some momentum)
- 3 month price return <20% (let’s not chase)
- 12 month price return > 0% (absolute momentum)
- 12 month price return < 20% (let’s not chase)
- 5 year price return > 0% (S&P 500 is down 12%, so this is a great LT momentum indicator)
- Price < 2X 52 week low (let’s not chase)
- Price within 10% of 52 week high (this is what we are trying to eclipse)
- PE < 1.4X 10-year median PE ratio (low or fair valuation)
- PE/LT Growth Rate < 1.4X (low or fair valuation)
- 2012 EPS estimate change stable for past three months (positive fundamentals)
If I can summarize, our goal is to identify stocks that are “working” but aren’t particularly aggressive. My hope is that some of these stocks are cheap enough and in a good enough technical position that the breakout, if it happens, leads to a sustainable long-term advance. Here are the 9 names that made the cut:
Please keep in mind that these are not recommendations. I have to say that I am impressed by this list. First, the names come from a variety of economic sectors. Second, the list spans market caps, with several Mid-Caps and a few Large-Caps. Finally, the metrics suggest very reasonable valuation, with no stocks sporting a PE above 20.
I am going to reserve most of my comments to three names that happen to be on my watchlist. Briefly though, a few other observations:
- Cinemark (CNK): The death of the movie theater has been greatly exaggerated – 3.5% dividend yield too
- Disney (DIS): While at an all-time high, the valuation appears quite reasonable with earnings projected to grow 15% or more over the next 18 months
- Montpelier Re (MRH) looks like a value stock with its single-digit PE and a 0.8X Price to Tangible Book Value and it also yields 2.1%.
- Travelers (TRV) is much better known and also yields a generous 2.9% while trading at 1.2X TBV, recently clearing an all-time high though trading just 3% above its year-ago price
- Cooper Companies (COO), known mostly for its contact lenses but also has a women’s health business, is breaking out to an all-time high, with analysts forecasting double-digit growth over the next two years
- PPG Industries (PPG), also trading near an all-time high despite some challenges in Europe that resulted in a large restructuring in Q1, offers a 2.3% dividend yield
I mentioned Texas Roadhouse last week, having added it last year to my watchlist after its founder took on the role of CEO again after having served as Chairman. There have been several headwinds for the restaurant industry (especially steakhouses), including a weak consumer and challenging food costs, but trends are improving. I think that TXRH is well-positioned for an improving economy and has a very strong balance sheet and a smart management team. The stock offers a 2% dividend yield and is very close to its all-time high set in 2005. I currently project the stock could trade to 21 or so over the next year based on 18PE.
I have followed ResMed (RMD) for many years, but I actually just added it to my watchlist recently. The company is focused on obstructive sleep apnea, a significant but under diagnosed disease that is associated with other diseases like stroke and diabetes. Its main business is to sell flow generators and masks that offer patients a good night of sleep. Its largest competitor was acquired by Philips several years ago, and both companies have grown nicely despite the challenging economy. The stock trades just below the all-time high set at the end of 2010. I currently project the stock could trade to 41 over the next year based on 18PE (plus adding back $3.50 per share in cash).
Finally, Carlisle is a diversified industrial company focused primarily on construction materials (roofing), but also brakes, electronic connectors, tires and food equipment. I first became attracted to the story in 2007 when the company brought in a smart new CEO. While the Great Recession slowed him down, he is now producing improving margins, with more to come in my opinion. I currently project the stock could trade to 70 over the next year based on attaining 15 PE.
Screening is a tool to identify stocks to study more closely for potential investment. In this case, we have identified 9 stocks that appear to have the potential to breakout of consolidation patterns or have just broken out. The valuations seem reasonable, and earnings estimates are stable to rising. Whether the market continues to rally or not, some of these stocks may continue to perform well.
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: No Position in any stock mentioned.
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