Money & Investing
Can You Buy and Sit Tight during a Bull Market? Try to Get on Board an Institutional Favorite!
"The big money is made in the sitting."
That is the timeless advice from the classic book Reminiscences of a Stock Operator.
Although the book was written in 1923, the guidelines are timeless. It is the story of how Jesse Livermore, who made and lost several fortunes, developed his trading strategy.
With the stock market now in a bull market, investors should have many opportunities on the long side. A lot of companies are starting to show improving earnings. That should be the key driver to push stocks higher. Nevertheless, there will be market pullbacks and scary shakeouts.
So, Livermore's advice could come in handy.
"It never was my thinking that made the big money for me," he said, "It was always my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. However, men who can both be right and sit tight are uncommon."
Selecting the right stocks to be in for the long haul of a bull market is, of course, the key. In every bull market, there are leading groups and leading stocks. There will also be the flash-in-the-pan speculative plays that will shoot higher and then burn out quickly like a meteor falling from the sky.
To play the long haul of a bull market, you need to find what are known as the "institutional favorites". They are the large solid companies that have their day in the sun during the new bull market. The driver for a bull market is the flow of money back into equity funds that then have to put that money to work in stocks.
Interestingly, market researchers have noted that, sometimes, a big winning stock in the prior bull market will not always be a big winner in the new bull market. So, one cannot mindlessly go into a prior big winner without doing one's homework.
Four key characteristics to look for when seeking a stock for a possible full bull market ride are as follows:
- Seek a possible institutional favorite.
- Look for solid, dependable earnings growth.
- Choose a stock in a strong industry sector.
- Time your buying by scaling into the play.
Big mutual funds like to show winning stocks in their portfolios. They try to get on board a big name winner. When they do, they are often reluctant to let go of it. Many times, the stock's price-earnings ratio during the bull market will rise well beyond what one might think is reasonable. So, don't be fearful of P / E ratios.
The stock should also have a big capitalization so as to be able to absorb heavy institutional buying. Many good-looking small and medium cap issues will not meet this test.
Solid earnings growth is important because it shows the company is consistent and will not upset the apple cart (no pun intended) with a disappointing earnings report. One should check the history of the company and the reliability of its management. That is a good way to get confidence in management earnings projections.
Every bull market has several industry sectors that are, as they say, "in". Often, a new product, service or key breakthrough that creates demand will be the driver for the stock and others in its group. In the past, we saw that with computers, the Internet, telecom and cell phones.
Finally, scaling into the stock position over time is a good way to avoid some of the bumps and headaches caused by market pullbacks that usually drag all stocks back at least for a time.
Here are a few possible candidates. In the medical area, Express Scripts, Inc. (ESRX) has been a steady stock climbing nicely, following its bear market low of 42.75 in March of 2009. The stock is now at 84.90 and in a good up trend.
The company is a pharmacy benefit management firm with annual revenues of 22.1 billion dollars. In the past 5 years, it has shown a 25.5 percent growth rate for earnings. This year, analysts forecast a 35 percent gain in net to 4.68 a share from an anticipated 3.46 a share in 2009.
Benefit management stocks have been strong. Express Scripts has market capitalization of 23.3 billion dollars. It has a good fund following. The 5-star-rated Fidelity Contrafund is the fourth largest holder with 2.5 million shares. It was a recent buyer of 75,000 shares.
In the retail sector, which could do well with a rebound in the economy, Amazon.com (AMZN) looms as a potential favorite. The company offers services for the sale of a wide variety of products on the Internet. Amazon has annual sales of 21.7 billion dollars. Its 5-year growth rate in earnings is a sensational 79 percent.
The stock has rallied from 34.68 during its bear market low in late 2008 to 126.03. The stock recently made an all-time high. Earnings for 2010 are projected to increase 38 percent to 2.62 a share from an anticipated 1.89 in 2009.
Amazon has a market capitalization of 54.6 billion dollars. The largest fund holder is 5-star-rated Fidelity Contrafund. Also, 4-star-rated T. Rowe Price Blue Chip Growth Fund is a big holder.
Some other potential big cap market leaders for a bull market could be Visa, Inc. (V), selling at 82.65, up from its bear market low of 41.78, and Priceline.com (PCLN), which is at 201.68, up from its bear market low of 45.15.
One should also be alert to any big cap initial offerings. It seems every new bull market gives birth to one of these leading stocks. Several in the past were Microsoft Corp. (MSFT), Amgen Inc. (AMGN) and, more recently, Google, Inc. (GOOG).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.
