Neil Macneale, is well known for compiling an ongoing model portfolio based on companies that have a...
8 Growth Names to Watch Now
07/07/2011 9:00 am EST
With the new market uptrend, a number of growth names with strong fundamentals are showing healthy chart action. Kier McDonough of Brigos Capital talks to Kate Stalter about a few of his top picks.
Kate Stalter: We're talking today with Kier McDonough of Brigos Capital in Boston. Thanks for joining us today, Kier, great to talk to you.
Kier McDonough: Great, Kate, nice to be with you today.
Kate Stalter: One of the things I wanted to ask you right off the bat: talk about your take on the current market conditions, and what an individual investor needs to know right now.
Kier McDonough: Sure, looking at the week coming into the holiday, the July 4 weekend, the market itself had a pretty powerful week. We saw the major indices bounce off their 200-day moving averages, which is really a long-term trend line.
That stayed intact-,it bounced nicely off of there. As the week progressed, we saw the major averages, the Nasdaq, the S&P 500, and the Dow as well, all pierce to the upside through their shorter-term 50-day moving averages.
That tells me that the longer-term picture is still intact, and that the short-term picture has improved quite a bit here. The market itself is currently in an uptrend.
Kate Stalter: Within that, what are some of the sectors or global regions that you see as showing strength right now, and why?
Kier McDonough: Sure, one technical note I want to give you first: The Friday before the holiday itself, July 1, the market had 91% of all stocks advancing on that day. Historically, looking back, anytime you have 90% of the stocks advancing in one day, that usually indicates a change in trend for the market.
That was probably the definitive clue to me that the market had changed direction.
I'll also give you one other thing that I look at. The price of copper. Basically copper has a Ph.D., as they say. They call it Dr. Copper. It basically has a Ph.D. in economics, because there is really no substitute for it, and copper looks like it broke a downtrend last week also.
On the bigger picture, it looks like the risk trade itself came back on, as opposed to risk off, when people go to Treasuries. People are actually putting more money into appreciating-risk assets.
Looking at some sectors at this point, the week that just finished, we saw technology, consumer discretionary, and the industrial group were some of the best groups last week. They were up about 6.4% to 6.5% for the week.
Some of the industries that I might back away from would be food, tobacco, and anything that's interest-rate sensitive, like utility stocks. That's where money will probably be flowing from, or not flowing as well as it has been while the market was correcting.
Kate Stalter: Given all that, what are some of the investments you're looking at these days to meet your clients' objectives?|pagebreak|
Kier McDonough: Primarily what I look for are what I call leading stocks in the market.
About 70% or 80% of my work is looking at companies with strong fundamentals, such as best-in-class products or services. One of the keys I always look for is accelerating earnings over the last three to four quarters.
For example, four quarters ago, maybe earnings were up 20%, the next quarter they're up 30%, then the next quarter they're up 50%, then they're up 70%. That gives me the idea that the company is doing something very well, and their business is accelerating, so that's what I look for.
If I start looking at what individual groups or sectors work, one in particular that's really standing out right now is consumer discretionary, which I mentioned earlier.
Of the major groups, this is the first large-cap group to make new highs here recently. That gives me a pretty good clue. If you look at the XLY, which is a consumer-discretionary ETF, I will use that to help give me an indicator of where the strength is, and then I'll look for the leading stocks within that group for my portfolio.
A couple of stocks that I like right here: Netflix (NFLX) broke out on some news about their Caribbean and Latin American business. They've had five quarters of accelerating sales and a couple of quarters of accelerating earnings. Last quarter, earnings were up 88%. They have a unique product, and they are the leader in their marketplace.
Another name that I like is Chipotle Mexican Grill (CMG). They're growing their business model nicely, and they've got a repeatable model. It reminds me of Starbucks (SBUX) back in the '90s, which went on a tremendous run because they were able to cookie cutter their business from location to location. Good margins and just a business they could replicate over and over again.
Two other stocks in that space that I like: Green Mountain Coffee Roasters (GMCR). They've really revolutionized the way people are drinking coffee. Their recent deals with Starbucks and Dunkin' Donuts look to accelerate their business. Another best-in-class company is Amazon (AMZN), which is making new highs as well. They are the leading company in online commerce. They're doing a terrific job.
One of the technology stocks that I like here is a company called Fortinet (FTNT). They're a software security company. They are the number one provider of unified direct management, and they've also had four quarters of accelerated earnings per share (EPS).
Kate Stalter: That's a fairly recent IPO, isn't it?
Kier McDonough: It is, it is indeed. That's another thing that I look for-companies that have come public in the last 10, 12, or 15 years. Historically it's been shown that that's when companies have their fastest growth phases.
A couple of the consumer stocks that I like here are Lululemon (LULU). They are the leading provider of yoga wear, if you will, or casual active wear. They're really a category killer in that spot.
Under Armour (UA) is another company in that space that does active wear. They've come up with some unique products. They're a recent IPO also, as is Lululemon, so these are companies that I'm looking towards because they have new products, new markets, and they're really growing their business quite rapidly.
Kate Stalter: A bunch of strong charts on these Kier. Thank you very much for sharing those.
Kier McDonough: Certainly, certainly. On the industrial side, one of the big cap companies I'm looking at right now is Caterpillar (CAT). They have five quarters of accelerated EPS. This is a big global growth story, and it's setting up a pretty nice base at this point. I'm watching to see if it's going to break out in the weeks ahead, but that's a big industrial name that I like right here.
Kate Stalter: It seems like you've given us a mix of different market caps as well.
Kier McDonough: I have. I tend to look to where the biggest growth is coming from, and I often concentrate more on the bigger, more liquid names, but occasionally you might find a smaller to mid-cap name that is really growing their business quickly.
Sometimes you want to take some action on those, because they are sometimes your biggest performers.
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