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September marks the end of summer, the beginning of the pennant drive in baseball and the home stretch for investors. So far, this has been a frustrating year for many investors, as the indices have been confined to relatively tight ranges. As of Tuesday, the S&P 500 ($INX) is unchanged for the year. The Dow Jones industrials ($INDU) and the Nasdaq Composite ($COMPX) are down 1% and 7.2% respectively.
Rising interest rates, surging oil prices, the ongoing threat of terrorism, an uneven economic recovery and an uncertain political environment have all contributed to the market¡¯s mixed tone. Though crude prices have begun to ease off their highs, the rest of these concerns should continue to dog the market through the presidential election on Nov. 2. Nevertheless, there is still plenty of time for investors to fine-tune their portfolios and turn in winning performances.
Screening for stretch stocks
We¡¯re going to accomplish this goal by using the MSN Money Stock Screener to search out stocks that have exhibited strong price and earnings momentum over the past few months. The reason is simple. As we head into the fall, or what¡¯s known in the business as the mutual fund/tax selling season, investors want to avoid owning stocks with hefty losses. Traditionally, these shares continue drifting lower amid end-of-year selling by investors.
At the same time, top-performing issues tend to build on their momentum down the stretch; portfolio managers gravitate to these stocks so they can end the year holding winners. Basically, the final quarter is much like the pennant drive; it separates the pretenders from the contenders.
Here are the steps I used to search out stocks positioned to give us the down-the-homestretch surge:
- Relative strength. I first sought out issues in which the three-month relative strength rating was equal to or greater than the six-month relative strength. In addition, the six-month relative strength rating needed to be 90 or higher. In other words, I sought stocks not only outperforming 90% of the market, but also gaining strength in recent months.
- Is the volume rising? It¡¯s important that recent price gains be accompanied by improved volume, so I screened for stocks with rising volume. I wanted to make sure that the average volume over the past month exceeded the average over the last quarter.
- Is the company showing earnings momentum? I wanted stocks that had beaten estimates by at least 5% in the most recent quarter. In addition, all of these stocks have seen the Street raise earnings estimates for the current quarter over the last few months. I also sought out companies that are expected to continue growing earnings by 5% or better next year.
- Are profit margins increasing? Finally, I screened for companies that improved gross profit margins by at least 10% over the past year; sported MSN StockScouter ratings of 7 or higher; and had a market cap of at least $250 million.
Twelve stocks emerged from the screen. Not surprisingly, there were several oil- and gas-related companies.
| 5 stretch-run energy stocks |
| Company |
Industry |
| Occidental Petroleum (OXY, news, msgs) |
Independent oil and gas |
| Varco International (VRC, news, msgs) |
Oil & gas equipment and services |
| Grant Prideco (GRP, news, msgs) |
Oil & gas equipment and services |
| Ultra Petroleum (UPL, news, msgs) |
Independent oil and gas |
| Oil States International (OIS, news, msgs) |
Oil & gas equipment and services | |
Naturally, these issues will closely mirror the movement in crude. Despite the bright earnings picture, these shares may struggle to maintain their momentum if oil prices continue to ease off their highs.
Rounding out the dozen is a broad-based collection of stocks.
| 7 stretch-run, non-energy stocks |
| Company |
Industry |
| IMC Global (IGL, news, msgs) |
Agricultural chemicals |
| Electronics Boutique (ELBO, news, msgs) |
Video games and electronics |
| Catalina Marketing (POS, news, msgs) |
Advertising |
| Teledyne Technologies (TDY, news, msgs) |
Telecommunications/technology |
| Harman International (HAR, news, msgs) |
Audio equipment |
| ESCO Technologies (ESE, news, msgs) |
Pollution and treatment controls |
| Building Materials Holding (BMHC, news, msgs) |
Home improvement stores | |
For investors who might consider a basket of 12 stocks cumbersome, I¡¯ve profiled three issues that look especially compelling when you combine their strong price/earnings momentum with solid financials and attractive valuations.
Electronics Boutique: A stock for video gamers
If you have children, especially young boys, then you probably know Electronics Boutique. The company sells video-game hardware and software, PC entertainment software and used video games and accessories. The company operates more than 1,500 stores nationwide primarily under the names EB Games or Electronics Boutique.
Buoyed by strong sales of its video-game software, especially ¡°Madden NFL 2005,¡± the stock has jumped 42% since early August. With the holiday season approaching and another mega-hit, ¡°Grand Theft Auto: San Andreas,¡± on the way in October, Electronics Boutique should continue to enjoy solid success. At only 15.8 times current-year estimated earnings and 0.45 times trailing 12-month sales, there¡¯s plenty of room for price/earnings multiple expansion.
Teledyne: A tech/communications play
Teledyne Technologies has experienced a strong run this summer, gaining 30% since late July. The stock began to rally after an excellent second-quarter earnings report. Earnings per share jumped 50% year-over-year on a 16% rise in sales. Investors also rejoiced in hearing management raise its 2004 outlook by 20%.
Acquisitions and improved operating efficiencies are behind the growth. At 23 times current year earnings, the stock isn¡¯t cheap, but it does trade at a discount to its peers. If it can continue to deliver positive news on the top and bottom lines, there¡¯s no reason to think that the stock won¡¯t continue to outperform the overall market going forward.
Teledyne makes broadband communication products, such as traveling wave tubes and solid-state microwave power amplifiers, switches and filters used in voice, video and data communication on earth and via satellites. Customers include the government, airlines, general aviation companies and industrial and communications companies.
Oil States International: Riding the oil boom
Oil States International provides specialty products and services to drilling and production companies operating in most of the world¡¯s active oil- and gas-producing regions. Bolstered by strong growth in its Tubular Services and Well Site Services segments, Oil States has delivered exceptional growth in recent quarters and has easily topped street estimates. As a result, the stock is up 43% over the last year and is just below its 52-week high set early last month.
Though the oil sector might experience some near-term backing and filling if crude prices continue to ease lower, the sector is well-positioned for strong earnings growth this quarter and next. Consequently, any pullback should be limited in scope and short in duration. Unlike many of its peers, Oil States is not just a good growth vehicle, but a good value. The stock trades at 15.7 times estimated 2004 earnings and 1.06 times trailing 12-month sales, with a p/e to long-term growth rate (PEG) of only 0.85.
Whether you want to diversify among 12, six or three stocks, the time has come to make those late portfolio adjustments that will position you maximum performance down the home stretch. I¡¯ll report back on the performance of these potential portfolio enhancers in the weeks and months to come.
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