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3 Market-Leading Stocks Headed Even Higher - 17328 views
WINDERMERE, Fla. (Stockpickr) -- The U.S. stock market is starting to act like it wants to enter that dreaded correction zone. I know the bulls don’t want to hear this, but trading is about making money, so it’s best to be aware of all possible outcomes.
The Dow Jones Industrial Average hit a high in February at around 12,391 and has since dropped as low as 11,983. This key index is now in a consolidation trading pattern between 12,283 and 12,041. If it fails to break out above the top of this range, then market players should expect to see it go much lower and possibly break the 50-day moving average of 11,981.
The S&P 500 also hit its high in February at 1344 before trading to a recent low of 1294. This heavily watched index, which is a favorite among many traders for a tell on market direction, has now entered a consolidation range between 1332 and 1303. Like with the Dow, if the S&P 500 fails to trade back above the high end of its near-term range, then I expect this index to slice through its 50-day moving average of 1300.
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Now, it’s possible that these minor corrections we’ve already seen in the major indices could be all that the bears are going to get for some time. The market has as much of a chance of breaking higher from here as it does of breaking lower. That’s why it’s really important to wait for the market to confirm its trend and direction. This will be clear once we see how these indices trade out of their consolidation patterns. Don’t guess; let the market tell you which way it wants to trade.
A number of market-leading stocks have already entered their own correction phase, which is never a great sign to see if you’re bullish. Take, for example, subscription movie streaming service company Netflix (NFLX). This stock was one of the darlings of 2010, but since late February it has dropped from $247 to under $200 a share over fears of competition from Facebook. Netflix has been under such heavy selling pressure that the bears have even managed to push this stock below its 50-day moving average.
Another example is online retailer Amazon.com (AMZN). This stock topped out in mid-February after it hit $191 a share, forming a perfect double-top chart pattern. Since then, shares have slid below the 50-day moving average all the way down to a recent low of around about $165 a share.
U.S. Internet and search king Google (GOOG) has also seen its stock raided by the bears in the past couple of months. Shares of Google have dropped from a high hit back in January of almost $643 to the current price of around $584 a share. This stock has also been driven below its 50-day moving average of $612 a share. The trend is now clearly down on Google, and it could be some time before the stock finds a bottom and starts to come under accumulation again.
Despite some of the negative action in the markets, there are still some stocks that are holding up well and bucking some of the recent market weakness. This is where investors should now turn their focus for potential buying opportunities. If the market does go into a major correction, these names will either be great buys on any pullbacks, or they’ll simply continue to trend higher. If the market doesn’t sell off much more, then I expect some of these names to just continue on their uptrends.
One stock that is uptrending nicely here is Sina (SINA), a provider of online media and mobile valued-added services in the People’s Republic of China. Sina has become the de facto way to play Twitter in China. The company operates a Twitter and Facebook-like service called Sina Weibo that currently has over 100 million local users. Sina is also a major player in the online advertising market in China. So far in 2011, this stock is red hot, with shares up around 31%.
There’s even some speculation on Wall Street that Sina could be a very attractive takeover target for its high growth rate and relatively reasonable valuation. The current market cap for Sina is $5.5 billion, and the stock trades at a forward price-to-earnings of 35. Sina is no slouch in the balance sheet department, either; the company has around $882 million of cash on the books and only $99 million of total debt.
What I like best about this stock is how well it continues to perform. A recent earnings-driven selloff in the shares pushed the stock below $75, but it has quickly bounced back and is now changing hands at around $91 a share. In the short term, this stock is on a one-way collision course with $95 to $100 a share. In fact, the only overhead resistance left on this name is at $95, so once it takes that level out, watch out, because I think it will set up to trade much higher than just $100.
Sina was also one of my earnings short-squeeze candidates last week.
Another stock that continues to act well and trend higher is OpenTable (OPEN), a name that well-known bears and skeptics love to hate. This company, together with its subsidiaries, provides real-time online restaurant reservation solutions in the U.S., Canada, Mexico, Europe, and Asia. The stock was one of the hottest names last year, and that trend has yet to stop in 2011, with shares already up around 24%.
This company recently released a pretty amazing press release announcing that OpenTable had seated its 200 millionth cumulative diner during the first quarter. It also said that diners seated via online reservations through OpenTable have now spent an estimated $8 billion at partner restaurants. That’s some amazing growth and execution from the management at OpenTable. However, all of that hoopla has resulted in a net operating income during the last quarter of only $17.9 million.
This is why there are so many skeptics on this stock. The valuation is very rich for OpenTable with its current market cap of $2.06 billion and its forward price-to-earnings ratio of 53. OpenTable’s current price-to-earnings ratio is even more eye-popping at a whopping 149 times earnings. Despite this rich valuation, I am going to tell you to forget all of the arguments based off of valuation for OpenTable.
None of it matters for one simple reason: The future growth prospects for OpenTable are mind-blowing. Consider this stat from the National Restaurant Association: There are about 960,000 restaurants in the U.S. OpenTable has said it has around 14,000 restaurants that are using their products and services. People love to cite future competition as a problem for OpenTable, but let’s not forget that the company can buy out its competition. In fact, it did just that with their recent buy of TopTable for $55 million.
The acquisition of TopTable is huge because it gives OpenTable an entrance into international markets such as the UK. Also, what’s to stop this company from innovating and providing new services to generate growth and revenue that nobody has even considered? The company reinvested about 15% of its sales back into research last year, so clearly management isn’t sleeping on that idea.
From technical standpoint, shares of OpenTable have recently slid from $96 a share to a low of $81, but during that slide, the stock never took out its key 50-day moving average. It has since bounced back and now looks poised to make a run at the next significant overhead resistance level of $91 a share. What’s really bullish about the chart for OPEN is that the stock continues to make higher lows even during the recent slide. Watch for this stock to take out $91, because once that happens, buckle your seatbelts and prepare for a retest of $96.
Once it breaks through $96, get ready to see this stock trade well north of $100 a share. In case I am wrong, I would use a mental stop at around $83 to $84 a share for shorter-term traders, and for longer-term trend traders, I would use the 50-day moving average at around $82.
OpenTable is a top holding of Yale University, whose endowment is managed by David Swensen.
Another market-leading stocks that traders should consider is Jazz Pharmaceuticals (JAZZ), a specialty pharmaceutical firm focusing on the development and commercialization of pharmaceutical products to meet unmet medical needs in neurology and psychiatry. This stock is off to a monster start in 2011 with shares up around 43%.
The company just reported a blowout quarter on Monday with fourth-quarter revenue of $53.4 million, compared with $38.3 million for the same quarter a year ago. Full-year 2010 revenue came in at $173.8 million, up 35% vs. 2009 revenue of $128.4 million. What’s even more important is that Jazz raised its 2011 guidance for EPS from $2.22 to $2.41 and for total sales from$232 million to $245 million.
Most of the company’s success comes from its narcolepsy drug Xyrem and its obsessive compulsive disorder and social anxiety disorder drug Luvox CR. The company said Xyrem revenue jumped 36% to $42.9 million while Luvox sales soared 65% to $9.4 million.
This is not an expensive stock for a company that’s growing rapidly and has a market cap of only around $1.1 billion. Shares of Jazz currently trade at a forward price-to-earnings of around 8.7.
From a technical standpoint, Jazz is on fire, stock trading near its all-time high of $29.73 a share. I love stocks that are hitting all-time highs and also have a strong fundamental backdrop. This is where the technicals and fundamentals collide to create strong uptrending stocks. I see no reason why this stock can’t double from current levels within a reasonable time frame, say a year or possibly less. As long as Jazz continues to grow its sales and earnings, the stock will almost certainly follow that trend higher. On any weakness, I would look to add this stock.
Keep in mind that Jazz is also heavily shorted, which is one of the main reason I think the stock can easily double from current levels. The current short interest as a percentage of the float for Jazz is a rather large 13.6%. I can’t think of anything worse from a trading standpoint than being short a stock that’s printing all-time highs. Keep this name on your radar.
To see more market leaders, check out the Market-Leading Stocks portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.