What I'm Watching Now

Ok, time to get down to business and look at some of the best stocks in the stock market.
Our current rally, which began March 1, as pronounced by IBD, hasn’t seen any real screamers, or “rockets” as IBD referred to them. These are stocks that break out and then go on an immediate tear, making you wish you had jumped in.

Instead, many stocks broke out, then consolidated gains by essentially going sideways in quiet trade.

While we’d prefer our stocks to take off, this has been constructive action. The market’s action the past two days is also showing us there is some serious buying going on, so hurry up and pick some good looking stocks and go with them.

I’ve said it before and it’s still the case: there aren’t dozens of great stocks in nice consolidation patterns to have to choose from. This makes sense as we are coming out of a severe recession.

If you run some stock screens or look through IBD’s IBD 100, you’ll see a number of stocks that have good ratings, but their recent sales and EPS growth is questionable. The most common problem is that sales are lagging, while EPS looks ok. Be careful: many of these stocks have great looking EPS growth because they’ve been cost-cutting and are also coming up on easy comparisons to last year.

When trolling for stocks, look for those with both solid EPS and sales growth that also have good projections. If you are deciding between two stocks with similar sales and EPS in the most recent quarter but one stock shows projections for flat EPS or negative comparisons and the other has projections for over 25% growth, go with the latter. These true growth stocks usually give you the best chance of nailing a big winner.

Here is a list of such stocks:

AIXG (double bottom with handle)
AMZN (cup with handle)
ASIA (cup with handle)
ATHR (cup with high handle, broke out, still in buy range)
CTRP (cup with high handle)
GMCR (flat base break out; slightly extended now)
MELI (cup with handle)
MRVL (cup with handle, just broke out, 1% above buy point)
PCLN (cup with high handle, broke out, still in buy range)
RUE (cup with high handle break out; slightly extended now)
The stocks above are all showing over 25% growth in their recent quarters with the normal strong fundamentals I want to see. They aren’t all perfect. For example, some don’t have the 17% return on equity (ROE) you’d like to see, but you often have to accept that not everything is perfect.

The stocks represent my favorite (not in an emotional, but rather in a rules-based way) stocks that are near buy points or are buyable right now.

Stocks that I also like but I’m not necessarily going to pull the trigger on are:

AAPL (cup base, broke out, slightly extended)
LULU (cup base, broke out on light volume, up 9%)
FIRE (cup with handle)
LFT (maybe double bottom? Needs time, may kick from list)
VIT (broke out of “V” shaped base, almost triggered 8% sell rule)

So why do I have these lists broken down this way? I run stock screens using IBD’s Daily Graphs service (Custom Screen Wizard) and come up with the top stocks from a fundamental perspective. I then go through each one, looking at their charts to see if they are anywhere near a buy point, then I check out their projections for the next two quarters.

After I have a short list of candidates, I start conducting serious, in-depth research on the ones I like best initially and move down the line.

Picking among the best is difficult, admittedly. For example, why didn’t I buy AAPL? It’s up about 6% from the buy point, looking just fine. I demurred because I just don’t see AAPL doubling in the next 90 days. No, I don’t expect this from my stock buys, but I would like this possibility. AAPL is a huge stock, it takes a lot of money to move it and it’s not exactly an undiscovered company. 903 funds own the stock. Where is the new money coming from? It will likely go higher; I just don’t think it will scream higher like other stocks could. Also, its break out was on above average volume, but not the 50% higher indicative of big money flowing. I would consider AAPL if other stocks weren’t really moving or showing signs of moving, hence it’s still on my watch list. I see utility in it.

LULU was a difficult one also. Young company, great growth, nice chart. But it broke out on average volume. None other than Bill O’Neil himself talked this stock up last week when I saw him speak. He seemed to like it (I have no idea if he personally owns it or not, he was simply talking it up), but volume didn’t come in until March 12 – 6 days after its break out, and up over 5% from the break out. Tough one. Volume hasn’t been seen since either. But it’s absolutely worth watching.

Meanwhile, the first list above has some stocks that either broke out on volume or are setting up rather nicely. And, a handful of them are young by stock market standards (these include AIXG, ATHR, CTRP, MELI and RUE). History shows stocks often make their big moves in the first 8 years of going public.

I continue to update my watch list. Every day I have looked for new ones, and as this rally progresses, I’m certain we’ll see a few more gems emerge.