Playing Nasdaq Rebound? Shoot Toward New Leaders
Want a potentially winning strategy for playing the nascent rebound in the technology sector?
Look for the new leaders.
These are the stocks that are sometimes little known to individual investors but that are clear favorites of institutions whose buying demand can be the biggest factor driving up a stock’s price.
The hallmark of a new leader is that its shares are rising strongly to a new high even as the major market indexes remain well below their peaks.
Wall Street pros say the stocks that typically assert themselves the most forcefully at the start of a market rebound are the best performers going forward.
Consider the process by which stocks emerge as new leaders.
During a downturn, mutual funds and other institutional investors typically hunker down by selling shares of all but their most favored companies. When the market slump eventually gives way to a rebound, institutions gradually open their coffers and direct cash back toward a handful of select names.
The result is that some stocks fall less than the general market during a downturn and are the first to pop into new high ground once a rally begins. Simply put, these are the stocks about which Wall Street is most upbeat.
For individual investors, the message is simple: Keep an eye out for stocks that are advancing strongly compared with the broad market, something known on Wall Street as high relative strength. In particular, look for stocks that are hitting new highs on big spikes in trading volume. It says a lot about a stock when institutions are willing to pay up for it even as scores of others are available at discounted prices.
To be sure, investors shouldn’t purchase any stock just because it’s hitting a new high.
In contrast to last year’s “dot-com” frenzy, companies with little or no earnings are likely to fare poorly in the near future. That means investors should look at companies with solid profits.
Typically, experts say, the best moment to buy such a stock is when it first breaks out to a new high on heavy volume, rather than after it has made a series of new highs and has become “extended.” In those cases, it’s better to keep an eye on the stock and wait for it to form a new “base”--a period of mostly sideways movement following a surge.
Indeed, some stocks that are viewed as new leaders on Wall Street have risen dramatically in the last several weeks. But anyone rushing into those issues now might do so just as the stocks yield to profit taking.
Equally important, investors must keep a sharp eye on the state of the overall market. New leaders may do well only as long as tech-dominated Nasdaq composite index itself is rising--and it’s anyone’s guess as to whether Nasdaq’s budding rally will continue.
Market bears point out that many tech stocks remain pricey despite the sector’s retreat from March to May. And though the general wisdom lately has been that the Federal Reserve is finished raising interest rates, there’s no guarantee.
While purchasing new leaders appears to be a straightforward and sensible idea, individuals all too frequently don’t follow that strategy because it goes against their instincts, experts say.
Indeed, whenever the market appears ready to bounce back from a sell-off, amateur investors frequently scurry back into the high-profile stocks that led the previous market advance.
Because the names of onetime highfliers are well-known, investors figure it’s only a matter of time before they recapture their glory.
Of course, some former winners do rebound, and the leaders of one market rally can turn out to be the leaders of the next as well.
But often, the former leaders languish. Even if a company’s prospects are sound, the market can sour on the stock for any number of reasons.
“Investors really cannot look at the old [leaders] and say, ‘It’s 80% off its high. It’s a great deal. I’m going to buy it now,’ ” said Kevin Marder, editor in chief of TradingMarkets.com. “Some of the names that were top performers from October to January and from February to March were so hard hit in the recent bear market in Nasdaq that they might never come back.”
Consider Qualcomm. It rocketed 2,600% last year, and, indeed, the company could be a world-beater in coming years. But beset by analyst downgrades and concerns about its prospects in Asia, the shares are off almost two-thirds this year.
Contrast that with Keithley Instruments, a maker of testing equipment for computer chips and fiber-optic components that has soared in value this month but that is hardly a household name.
The “Momentum Stocks” chart that accompanies this article lists some of the new leaders that have emerged in the last month. Some names, such as Paychex and Phillips Electronics, may be recognizable. Others, such as Anaren Microwave, may not be.
Some trading pros say investors should be wary of buying many of the stocks on this list at the moment. Many of the shares have had strong runs recently and could be poised for short-term pullbacks. Even so, they bear watching in the next few weeks and months and could be excellent buys if they pull back modestly or if they begin to form new bases.
To make the list, a stock had to have good relative strength in the last three months, meaning it performed much better than the overall market. It had to have hit a new high in the last week. And it had to have both annual and quarterly earnings growth in excess of 35%.
To screen out speculative penny stocks, share prices had to be $30 or higher with an average daily trading volume of at least 100,000 shares.
The other chart with this story shows stocks that have fallen from their highs--sharply, in some cases--but that some pros believe could be poised for another strong run. Marder of TradingMarkets.com, for example, is keeping an eye on such names as Brocade Communications, JDS Uniphase and Check Point Software Technologies.
Hedge-fund manager Greg Kuhn is watching Cree, Flextronics International and Nortel Networks, among others.
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Walter Hamilton can be reached at walter.hamilton@latimes.com
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Momentum Stocks: The Market’s New Leaders
Here are some stocks that have come on strongly as the Nasdaq Stock Market has rallied in the last month. The stocks share several characteristics: strong three-month relative strength, a new high in price in the last week, and both quarterly and annual earnings growth rates topping 35%. But note: Many of the stocks are trading far above their 50-day moving averages. Some analysts argue it’s better to wait to buy stocks such as these until they pull back somewhat, assuming the fundamental backdrop for the companies’ remains positive.
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Stock price Ticker Mon. change in Pctg. above Recent EPS Company symbol close last month 50-day avg. growth* Keithley KEI $74.19 167% 94% 174% Instruments Anaren ANEN 124.88 114 59 71 Microwave Tollgrade Comm. TLGD 128.00 103 61 51 Semtech SMTC 77.69 61 28 128 Nvidia NVDA 165.94 57 53 829 Syncor SCOR 65.75 52 42 38 International MedImmune MEDI 74.75 51 31 66 Forrester FORR 75.00 47 33 47 Research Sanmina SANM 85.00 47 34 37 Xilinx XLNX 87.06 30 18 405 Quanta Services PWR 57.00 27 12 255 Phillips PHG 50.22 21 12 108 Electronics Paychex PAYX 40.44 17 16 36 DST Systems DST 78.75 10 5 93
Recent earnings Company surprise** Keithley 33% Instruments Anaren 9 Microwave Tollgrade Comm. 70 Semtech 7 Nvidia 21 Syncor 20 International MedImmune 7 Forrester 15 Research Sanmina 7 Xilinx 5 Quanta Services 33 Phillips -- Electronics Paychex 3 DST Systems 15
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* Earnings growth in most recent four quarters versus previous four quarters.
** Percentage by which earnings in most recent quarter topped analysts’ consensus estimate.
Sources: MSN MoneyCentral, Bloomberg News, Zacks Investment Research
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Poised for Another Run?
Some Wall Street “technicians” are watching these stocks for signs that they may be emerging as market leaders. Many are still trading well below their 52-week high prices, though they have been rallying lately.
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Pctg. below Ticker Mon. Mon. 52-week Name symbol close change high Nortel Networks NT $68.25 +2.38 5% STMicroelectronics STM 67.00 +1.25 9 Flextronics International FLEX 71.63 +0.50 10 Siebel Systems SEBL 156.63 +11.50 11 Brocade Commun. BRCD 159.50 +3.50 14 Ciena CIEN 157.19 +11.75 17 JDS Uniphase JDSU 125.63 +2.19 18 Cree CREE 161.63 +2.13 20 Kopin KOPN 79.25 +0.75 21 Art Technology Group ARTG 83.44 +7.88 22 Redback Networks RBAK 154.56 +19.06 22 PMC-Sierra PMCS 188.06 +1.25 26 Check Point Software CHKP 218.69 +5.06 26 Micromuse MUSE 144.06 +9.81 30 Network Appliance NTAP 82.06 +5.13 34 BroadVision BVSN 55.19 --1.25 41
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Sources: Bloomberg News, Times research
