Money & Investing
Looking for Big Winners in 2010? Try Quality:
A Look at Priceline.com, Baidu and Visa, Inc.
The past several months in the stock market have been a sweet spot for bulls. Many issues that were hammered down in the bear market from late 2007 to early 2009 have bounced back strongly.
So, what's up for 2010?
I recently had the opportunity to catch up with an old friend, Paul Rabbitt, who publishes his quantitative stock research at Rabbitt Analytics. He was formerly with Oppenheimer & Co.
Rabbitt was in Phoenix to address members of the American Association of Individual Investors. Interestingly, the group switched their meeting place from a hotel to the Franciscan Retreat Center near Scottsdale. Perhaps, they felt a little prayer might help, especially if some investors went through the fire of the bear market for a few years.
In any case, Rabbitt told the group that, in his analysis, many of the best-performing stocks in the current bull market that started in early 2009 were of surprisingly poor quality.
Rabbitt uses a system called a Q-Rank that measures nine fundamental and technical qualities of 3,000 stocks. It includes things such as relative strength, industry strength, earnings surprises, earnings acceleration and earnings consistency.
Rabbit was right on with his perception!
The best gainers on the Big Board were -- to put it quite bluntly -- some beaten down stocks that bounced back sensationally.
The biggest winner on the NYSE in 2009 was Dollar Thrifty Automotive Group (DTG) up 1,925 percent for the year. Avis Budget Group (CAR) surged 1,614 percent, Valassis Communications Inc. (VCI) jumped 1,337 percent and Dana Holding Corp. (DAN) climbed 1,141 percent.
If you look at their stock charts, you'll see that they appear to have taken investors for a roller-coaster ride.
The point: Investors were driving up the prices of some of the most "battered and poorest quality stocks in terms of fundamentals". They, to the surprise of many, were the big winners.
However, Rabbitt now expects high-quality stocks with strong relative strength and, most importantly, with good earnings projections, to star in the next phase of the bull market, which could take place in 2010.
"Just when people think the speculative stocks are the place to go, then the money flow will shift and start to go into better quality issues," Rabbitt told the AAII group, "That is what I expect in the next phase."
There are some key characteristics one should look for to find those "high-quality stocks". Check for issues:
- Making new highs
- Projecting strong earnings
- Belonging to a strong industry
- Attracting a strong institutional following
- Priced at more than 25 dollars
A stock making new highs means it is in an up trend and has overcome near-term "overhead resistance". That means that no buyers bought at a higher price recently who will be anxious to sell to, at least, break even. In effect, the stock has a chance for "clear sailing".
Strong earnings mean that the company's business is a success and its products or services are in big demand. If the stock belongs to a strong industry group, it could well mean that there is some product or service that everyone wants now.
A good idea is to go after the "leader" in the group. You can find that stock by noting the one that moves higher first when the group moves or the one that has the largest appreciation in the group over the past few months. The leader in a group is not necessarily the biggest company in the industry.
Finally, you want a stock that is attractive to institutions. The stock should have liquidity and generally be more than 25 dollars. These kinds of stocks are the ones big money goes into and that big money can drive higher over an extended period of time. Why? Because institutions just want them in their portfolio.
Generally, during a strong bull market, only a few industry groups tend to lead. They are the ones that have a new product or service, or they could be a cyclical group that is coming into favor. So, you need to be alert for that development.
Going into 2010, several candidate stocks with quality could do well. One is Priceline.com (PCLN). The company with sales of 1.9 billion dollars provides an e-commerce service enabling consumers to save money on a variety of products and services.
Priceline's stock has made a new all-time high. It is now trading at 215 dollars. It has climbed 200 percent in 2009. Analysts expect Priceline's earnings to jump 52 percent in 2009 to 7.72 a share from 5.09 a year ago. Looking ahead to 2010, they forecast a 25 percent gain in net to 9.69 a share.
Another potential leader is Baidu, Inc. (BIDU), the Chinese Internet search provider. It also offers Japanese search services. It has annual sales of 468 million dollars. The Street is forecasting a 39 percent increase in net for 2009 and also for 2010. The stock is trading at 415 and recently made a new all-time high at 443 in December. For 2009, Baidu's stock has appreciated 226 percent.
Finally, another good-looking stock on the Big Board is Visa, Inc. (V), the world's largest retail electronic payments network. It is a big cap play with sales of 6.9 billion dollars. For the fiscal year ending September 30, 2010, analysts predict a 21 percent gain in net.
Visa became public in 2008. It fell in the bear market but has since rebounded strongly. The stock is at 87 and has appreciated 66 percent in 2009. Another stock in the same group, MasterCard Inc. (MA), is doing well and trading at 247. Its earnings should rise 19 percent in 2010.Mr. Fasciocco is the publisher of Ticker Tape Digest at www.tickertapedigest.com. He is a contributing writer for several publications. Mr. Fasciocco can be reached at leo@tickertapedigest.com.
