Money
& Investing 
How to Spot the High-Quality "Sleeper Stocks" Just before They Wake Up -- a Look at Shanda
Several years ago, I had the opportunity to meet David Ryan, two-time winner of the U.S. Investing Championship. When we chatted, he showed me some unique and interesting technical ideas on timing the buying of stocks.
I think they could be of help to most investors.
Timing is everything. If you get off to a good start, it seems you are half-way to your goal. Some investors tend to get sloppy with the timing of their buy entry points. This is something that should be avoided.
One of the tactics David mentioned was looking for entry points on high-quality, leading stocks that were currently "sleeper stocks".
A "sleeper stock" is one that seems to be doing nothing. There is not much price movement and not much volume. The stock seems to be snoozing. Most investors bypass these issues. There's no action.
Ah! But, this is just what David likes to look for in a stock. And, that is what he sometimes uses as his entry point.
It is exactly what Dr. Alexander Elder comments on in his book Trading for a Living. Elder often points out that it is not a good idea to run with the crowd.
So, what are the characteristics of a top-notch "sleeper stock", and how do you find them?
First comes stock selection. Ryan was a follower of William O'Neil, a top trader who wrote the book How to Make Money in Stocks. O'Neil looked for stocks with strong price momentum and powerful earnings growth. He also wanted a company with a new product or service.
To select potential sleeper stocks, you need to find leading stocks. They are the ones trending higher in price, near new highs and with strong earnings projections. These are the candidates for a possible buy. Next, they need to be in a price-basing pattern.
Generally, these stocks have good institutional sponsorship. That means top-rated funds hold positions in these stocks. A stock needs to attract institutional buying to be a big winner.
Some of these stocks to watch include Illumina, Inc. (ILMN), AsiaInfo Holdings, Inc. (ASIA), Pegasystems, Inc. (PEGA) and Apac Customer Service, Inc. (APAC). There are others. The watch list would be much longer in a strong bull market and economy.
Generally, you would buy a leading stock on a breakout from the base with expanding volume. What Ryan was on alert for were stocks that were in a base near a breakpoint (the top of the base) but were showing low volume and a tight daily trading range (the range from high to low for the day).
Market technicians have found in their research that a good base setup happens when the volume contracts toward the end of the base. This would indicate that profit taking (selling) from the prior run-up was over. The stock may be set to move up again.
What Ryan would do is buy near the top of the base when volume was extremely low. He used to say the volume would look like a "dot on the chart". He would sometimes look for that dot setup on small bases or flags of just 3 or 4 weeks. They are not frequent. However, when one can spot them, they are often very good buy points.
Shanda Interactive (SNDA), the Chinese interactive media firm, earlier this year was in a base between 34 and 27 (see following chart). The key "sleeper day" was March 9 when the stock traded just 750,000 shares, and the trading range for the day narrowed.
The next day, the stock moved higher and broke out from the base on expanding volume -- it "woke up". SNDA ran up to 54 in just a few weeks for a gain of 42 percent from the sleeper-day entry point at 31.
A good way for investors to spot these "sleeper setups" is to make a list of leading stocks in strong up trends that are now basing (going sideways). Everyday, check their volume, and, if it is very low and the stock is near its breakpoint, consider it a possible play. One such stock could be Illumina (see chart).
These plays are often overlooked by the average investor. The "sleeper" entry point, if it works, can yield a good return, as the crowd wakes up and starts to stampede into the stock, driving the price higher.
Of course, you should always have a stop strategy in place if the setup does not click.Mr. Fasciocco’s is 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
