Don’t Dismiss Stocks Trading Near Highs

06/13/2012 1:45 pm EST

Focus: STOCKS

Kate Stalter

CMO & Senior Financial Advisor, Better Money Decisions

Stocks rallying to new heights in a market downturn are worth tracking because their existing technical strength can be a precursor of further gains. MoneyShow.com’s Kate Stalter details three current leaders showing strong revenue growth along with healthy chart action.

To many traders and investors who were conditioned early to seek value names, the idea of buying a stock that’s near a new high is almost unthinkable.

However, as the expression “trying to catch a falling knife” is applied more frequently to the trading world, there’s a growing understanding that buying into strength is often a better strategy than buying into weakness, and hoping you’ve caught the stock as it’s bottoming out.

In several of the screens I run, I am noticing stocks trading at or near new highs. That’s in contrast to the general market, which remains in a correction.

From the consumer staples sector, Church & Dwight (CHD) has been trading in a narrow range below its May 16 high of $54.59, holding above its 50-day moving average. Consolidation within a narrow trading range is often a bullish indicator, showing that professional investors are holding shares, anticipating further upside.

Church & Dwight is a mid-cap, with a market value of about $7.6 billion. It moves about 792,000 shares a day. The company is expected to report its second quarter sometime around August 2, so that won’t factor in for several more weeks.

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Since bouncing off its ten-week line in February, the stock has trended steadily higher, showing fairly tight trade, rather than the volatility that’s all too common in other stocks.

The maker of Arm & Hammer baking soda, toothpaste, laundry detergent, and other products has posted solid—though not outstanding—growth in both sales and earnings in recent quarters. It’s seen growing income in the low double digits in the next two years.

The stock was hovering just above its short-term five-day moving average early in Tuesday’s session. In a bull market, it could potentially be in buy range, but a confirmed market downturn prevents me from entering new longs most of the time, as it’s too easy for a new round of market-wide selling to drag down even strong technical performers.

Another consumer-facing name trading near new highs is Monster Beverage (MNST), the company formerly known as Hansen’s Natural. The stock zoomed to a high of $83.96 on April 30 on rumors that Coca-Cola (KO) was buying the energy drink maker.

However, it retraced all those gains, and finished the session with a loss as Coca Cola denied the rumors. The two companies have a distribution deal, but that’s it.

Monster reported its first quarter on June 8, and the stock jumped 2.1% in heavier-than-normal turnover.

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Even without that anomalous trade on April 30, the stock’s uptrend along its ten-week line has been robust. It’s too soon to say whether a buy point might occur before the stock retakes that $83.96 high, or whether it will continue rallying past that point in a market downturn. In fact, a pullback could even be constructive at this juncture, allowing the stock to refresh itself and get ready for the next market-wide uptrend.

In any event, I’m continuing to watch Monster. Stocks that outpace the broader market in a downturn are often well situated to continue leading in the next rally.

A small-cap that is making forays into the consumer marketplace is another whose stock is trading near its high. 3D Systems (DDD) is best known for its printing and prototyping technologies used in the automotive and health-care industries. Last month, it acquired Bespoke Innovations, designer of customized prosthetic limbs.

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3D’s stock is consolidating in a healthy fashion above its short-term moving averages. It pulled back to its 15-day exponential average on Friday, but got support there. It’s shown gains since.

So far in 2012, it’s an undisputed winner, advancing 123%. Put that in the context of the Nasdaq Composite, which is up 8.3%, or even the Russell 2000, which is up a paltry 1.4% year-to-date, and is working on its third month in a row of downside trade.

3D Systems is expected to report its second quarter in late July. Analysts see earnings of 26 cents per share on revenue of $84.12 million. That would mark no increase on the earnings side, but a strong year-over-year revenue gain of 29%.

For 2012, Wall Street has pegged earnings at $1.07 per share, which would be an increase of 49% over 2011. The company is seen growing earnings another 23% in 2013, to $1.32 per share.

While I never use fundamentals to make buy or sell decisions, I do use them as a screening mechanism. If the institutions have confidence about a company’s ability to continue growing on the top and bottom lines, it’s a good indicator of whether they’re inclined to make further investment in the stock.

At the time of publication, Kate Stalter did not own positions in any of the stocks mentioned in this column.

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