9 Top Picks from a Growth Manager

11/09/2011 7:00 am EST

Focus: STOCKS

Kier McDonough

National Speaker, Investor's Business Daily

A number of growth names are rising on heavy-volume buying, spurred by good fundamentals, says Kier McDonough. He tells MoneyShow.com how he zeroes in on these names, how he trades IPOs using technicals, and how he keeps losses to a minimum.

Kate Stalter: Today I’m speaking with Kier McDonough of Brigos Capital.

Kier, I’m looking at your latest e-mail that goes out to clients. You mentioned that we are in the fifth week of an uptrend. I know a lot of people are probably so frustrated by the volatility in the current market, they may not have even been aware that there is an uptrend. Can you give us a little context of what you’re seeing in the indexes right now?

Kier McDonough: What we’re seeing here is: Obviously we’ve had a pretty good correction in the market this summer.

The major indices corrected about 20% from August through the low in early October—October 4 was actually the low. Since then, we’ve seen roughly about an 11% move off the bottom on the major indices, the S&P 500 and the Nasdaq, which are the two indices that I concentrate on.

Some of the leading groups that I’m seeing out there right now, if you want to get into some group work: the apparel group, which has companies like Under Armour (UA) and Deckers (DECK), the shoe company. I’m also seeing some of the older, more established companies like Nike (NKE) and Coach (COH) and VF Corp. (VFC) acting very well also.

On the retail side, I’m starting to see stocks similar such as Panera Bread (PNRA). We just saw a breakout on General Nutrition (GNC).

In the finance group, MasterCard (MA) had a good week last week on excellent earnings, and the utility stocks are actually acting very well also, so on the group side, we’re seeing some good action. We have some leading stocks that are working as well.

Kate Stalter: You like to compare historical charts versus what we’re seeing currently in the market. One of the examples you use is eBay (EBAY) from the late 90s and the recent IPO, Fusion-io (FIO). Can you say a bit about that?

Kier McDonough: I sure can. The precedent analysis is very helpful. It doesn’t mean the past always is going to be your prologue for the future, but at least it gives you some reference points.

Back in 1998, eBay had its IPO in early summer, just before we had a big correction in the market at that time—about 33% in the general market in about a 12-week period.

We find that leading stocks, or recent IPOs, can often correct a lot more than the general market. EBay went down over 50% during that timeframe. When the market turned and went north, the stock had a fantastic move coming out of there. It ran over 800% over the next several months; over the next 26 weeks, it ran over 850%.

So when I look at Fusion-io, they have very disruptive technology in the storage space. The company came public roughly six months ago and it, too, corrected about 50% during this market downslide, or more than two-and-a-half times the general market itself.

They really do have some interesting new technology, and we’ve seen a lot of leaders in this space over the years—companies like EMC (EMC) and Iomega were big winners when they came out with a new technology in that storage space itself.

Now Fusion broke out last week on excellent volume. Earnings were up 350%, sales were up 175% for the quarter.

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Kate Stalter: A couple of things that I’m wondering, after what you just said there, Kier. First of all, let me ask you about buying IPOs. There’s always a lot of excitement in the general market, and in fact, just the other day, when Groupon (GRPN) came out, there was a lot of frenzy surrounding that IPO.

What’s the best way for people to approach an IPO if they’re interested in buying it?

Kier McDonough: Sure, that’s a great question. The best thing to do is let them trade for a while. Let them get some kind of seasoning and trading history.

What I look to do is have them establish some type of consolidation pattern. Sometimes it might be weeks, sometimes it might be months, sometimes it’s even longer than that.

What you’re trying to do is have a high-probability spot to put money to work in a name like this when it’s moving out of the base or consolidation area and breaking out on high volume. That’s really the approach that I take to this.

Kate Stalter: Another thing that you had mentioned when you were talking about some of these stocks: You had talked about not just the charts, but also the fundamentals. Talk a little about how you use both of those in your approach.

Kier McDonough: Absolutely. The fundamentals are probably about 70% to 80% of the process that I look at. I’m looking for companies that have very strong earnings and sales, return on equity. You like to see dynamic, game-changing products or services that they have at the time, and so that’s really the important part.

It’s kind of like playing the piano: It plays better with both hands, so if you have one hand as your fundamental, one hand as your technical, you want them both to play together at the same time, and hopefully you make some good financial music out of that.

Kate Stalter: Okay, that’s a great way of looking at it. Let me ask you one final question: Today I started out by talking about some of these choppy market conditions, some of the uncertainty going on. What’s your best advice for retail investors to approach this current situation?

Kier McDonough: Sure. If the market has been very, very choppy, I think you hit it exactly right. It feels at times like it’s one-and-a-half steps forward and one step back at times.

We’ve had a very news-driven market. Good news, the market rallies. Bad news, the market goes down. So I think the best approach is to be very patient and very disciplined and let the market pull you in.

By that, I mean: If you buy a stock that’s coming out of a consolidation on big volume, has excellent fundamentals, and you begin to make money on that name, that’s kind of your cue that you’re in sync with the general market. Now it’s okay to put more money to work. You let the market basically pull you in instead of plunging into the market.

Kate Stalter: So really, it’s about following the market—not trying to second guess it or predict or outsmart it or argue with it, or any of those other things.

Kier McDonough: I couldn’t have answered that any better. We basically look at the market and interpret what the market is telling us.

One of the best ways to interpret if you’re in sync with the market is look at your account. If you’re making money, that means you’re in sync with the market, and if you’re not making money in the market, why would you continue to try to buy stocks if you’re not really in sync with it at this time?

Kate Stalter: I said that was the last question, but I do have one more. What’s the strategy, in light of what you just said, for cutting losses?

Kier McDonough: I think that’s the thing people struggle the most with. Having taught seminars for a number of years on investing in growth stocks, I find most people struggle the most with selling. They’re very good at buying.

But on the selling strategy: Have an exit strategy when you buy, a very disciplined approach—whether it’s 7% or 8% or a maximum 10%, let’s say, because you really don’t want to have big drawdowns in your portfolio. I think the No. 1 investing rule is: Cut your losses short.

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