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08/31/2011 7:00 am EST
Agriculture, auto repair, and health care are some of the industries that Edward Hornstein sees showing unusual strength in a choppy market. He also likes old standbys such as Apple (AAPL), Priceline (PCLN), and Amazon (AMZN).
Kate Stalter: Today we’re talking with Edward Hornstein, of Hornstein Capital Management, and thank you so much for joining us today.
Edward Hornstein: Thanks for having me, Kate.
Kate Stalter: Give us your impressions of which areas of the market are showing strength right now, and why you believe these particular areas are among the leaders.
Edward Hornstein: Well it’s actually easiest to isolate strength during a downtrending market like we had, or even a market that appears to be trying to find its footing a little bit.
Obviously, there is not a plethora of leadership at the moment, especially in growth-stock land. But a few areas are showing some strength. Some of them tend to be a little bit more defensive in nature, which I don’t know how well that speaks to the duration of this rally. We’ll certainly need to see more leadership.
There area a few areas, such as some of the ag names, some of the agricultural stocks. Obviously, CF Industries (CF) in the fertilizer group. That’s one of the few stocks that actually gone on a 52-week high ground recently, and made progress there. There’s not that many of them.
Some of the other fertilizers in the group like Potash (POT), Mosaic (MOS), and Agrium (AGU) appear to be coming up the right side of shorter basis. If you look at their weekly charts, they’re actually in longer consolidations. Some of these other fertilizers that I’ve been watching closely, it’ll be interesting how they develop over the next few weeks, should the rally continue.
There is some leadership too in some of the defensive groups, the auto replacement-part stocks, AutoZone (AZO) and Monro Muffler (MNRO) to name two. Again, those are typically a little bit more stocks that might do well in a slowing economy. I’m not sure if they’re your typical dynamic growth stocks, but that area has been pretty strong.
You are also seeing some strength in some medical stocks. The computer software-medical group has a few stocks in it that actually really didn’t show a lot of distribution during what pretty much was a market crash over the last few weeks. A bunch of these stocks held their 50-day moving averages.
These three stocks are showing a lot of accumulation. They’ve withstood the selling extremely well. They’ve got good relative strength. They’re all approaching 52-week high ground here. You might have a little bit of leadership there.
You have some other names, some miscellaneous names. Hansen Natural (HANS), from the beverages industry, is a stock that has gone into 52-week high ground. It’s a little bit extended now. That’s a growth name showing some leadership.
Then you have your typical growth plays that have been going since the 2009 bottom, such as Apple (AAPL), which withstood the selling very well, and it’s attempting to run up to that $400 level where it encountered some selling a few weeks ago.
Then you have some of the other larger-cap growth names that have worked well over the past few years. They’re attempting to come up the right sides of the bases, such as Priceline (PCLN), and Amazon (AMZN), and Intuitive Surgical (ISRG).
But it’s probably a little bit too soon to know how the script is going to be written on some of these stocks. They’re little bit late stage, they’ve had big runs.
It’s probably going to be a function of the market, if they can get their act together and maybe have another move here, or if they’re just going to run up and eventually tap out if this rally does fail. I think these are stocks just to monitor at this point and see how it unfolds.|pagebreak|
Kate Stalter: Let me ask you this, Ed: Are there any areas—global regions, sectors, assets classes or individual stocks—that you believe investors should avoid right now?
Edward Hornstein: Well, obviously it depends on an investor’s timeframe. Tending to be a growth investor that looks for that intermediate or long-term trend and follows the CAN SLIM methodology that Investor’s Business Daily teaches, I would want to avoid stocks that might appear to be cheap, and might appear to be beaten down, but don’t really have relative strength, and have shown persistent selling over the past few months.
I think the financial group is one area. If you look at the major US banks like the JPMorgan Chase (JPM), Goldman Sachs (GS), Citigroup (C), Morgan Stanley (MS), Bank of America (BAC), these stocks can have giant snapbacks because they’ve been beaten up so much.
But I think the fact that they’ve sold off so much, and that they have continued distribution, is a testament to the fact that these aren’t stocks—at least for the discipline that I follow—that I would want to be putting my money in.
It’s pretty simply a function of wanting to put my money, if I am going to invest, in the stocks that have the best relative strength, that really withstood the selling during the past few weeks. And that are the quickest to kind of snap back, and run into new high ground.
I’d say the financial stocks could very well be dead money for a long period of time. That’s not to say they aren’t going to have vicious, short recovering rallies, or they're not going to bounce like they did coming off the 2009 bottom, but I think you have to be wary there.
I think there are some macro issues going on with some of these banks. I certainly wouldn’t advise anyone to be a hero and try to catch a falling knife with them. I think that they probably should be avoided, unless you’re willing to take on a ton of risk, which is not something that I would advise.
Kate Stalter: You’ve named a number of some of these top-performing growth stocks today that you say are worth a look, worth some research, because they may have some potential ahead. Anything else, on an intermediate or longer time frame, that people might want to look into as a watch list candidate?
Edward Hornstein: You know, the problem now is that there is a lack of solid leadership. Things could develop a little bit more in the next few weeks.
In terms of specific names, I think that the best thing people can do is just to run screens to see what stocks are hitting 52-week highs, or are above at the 50-day moving average.
You’ll find a few names. Another name I have been watching pretty closely here is PriceSmart (PSMT). This is a retail stock. They operate warehouse clubs in Central America and the Caribbean. I guess the analogy would be like a Sam’s Club (WMT) or Costco (COST) down in the Caribbean or in Central America. They’re growing pretty well.
The interesting thing is, if you look at a chart on that stock—either a daily or a weekly chart—you’ll see that the stock really did not sell off at all. When the market came down about 20% at the end of July, until about a week or two ago, this stock hit a high of $62 in July, and really only came down to the low $50s area.It held above its 50-day moving average, and there’s really not a lot of selling.
As the market starts to come up, lo and behold this stock is [approaching] its 52-week high today.
It’s a smaller stock; it doesn’t have the liquidity of some of the other larger-cap growth stocks. It only trades about 300,000 shares a day. You want to see an increase in volume, into what I call a stock growing up.
OpenTable (OPEN) would come to mind as an example. OpenTable was not a very liquid stock when it first came out. Then all of sudden, a year later, it traded a few million shares a day and really got the interest of the institutions.
With PriceSmart, before getting very exposed, I’d want to see a real pickup in volume, and start seeing in the charts that the institutions are becoming very interested in it.
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