Nibble on This Red-Hot Growth Story

02/08/2011 12:50 pm EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

OpenTable’s lofty share price could get another boost from this week’s earnings, writes Michael Cintolo, editor of Cabot Top Ten Weekly.

There’s no question that this market uptrend has been on thinner and thinner ice during the past few weeks. The number of stocks hitting new highs (one measure of breadth) has declined each time the indexes reach new-high ground during recent weeks.

So it’s time to get out our bearish playbook, right? Not so fast. The advance that began on Sept. 1 has been so persistent that you just can’t count it out until you see definitive evidence that the trend has changed. And that means focusing on the indexes and leading stocks, not secondary indicators like sentiment or the number of new highs.

At some point, I do believe we’re going to get an intermediate-term correction, something like a 5% to 10% pullback (likely sharper among individual stocks). That correction could start very soon … or not occur for another month or two. It’s best to let the action of the market guide you. In the meantime, watch your current holdings and be discerning when it comes to new buys—stick with institutional-quality stocks with good set-ups and great stories.

A Very Tasty Business Model

One issue to consider is OpenTable (Nasdaq: OPEN), the hands-down leader in online restaurant reservations. The story is pristine, as the company is by far the top dog in the industry, and it gets paid recurring monthly fees from restaurants using its system as well as a small cut of any diner that books a reservation using its service. The result is rapid, accelerating growth and profit margins that are going through the roof. (Third quarter sales were up 44%, earnings were up 188% and the after-tax margin was a whopping 22.9%.)

It’s also resulted in a stock that has come a long, long way—OPEN’s advance kicked off about a year ago, as it gapped up to $30 on earnings. Now the stock is above $80, so it’s clear shares aren’t exactly early in their advance. Still, I think the stock could have another leg up soon.  Here’s why.

First, the stock has formed something akin to an “ascending base;” it’s had three sharp pullbacks during the past 18 weeks, but each one found support near or just below the 50-day moving average. And, also, each successive pullback came at higher prices than the prior one … hence the ascending look to the stock’s chart.

OpenTable is reporting earnings on the evening of Feb. 8, which will probably make or break the stock’s near-term future. But if you see a strong move above $83 or so, I think it’s buyable. [Shares have risen steadily ahead of earnings, closing at $84.80 Monday—Editor.]

But please note that OPEN is a wild character, so if you buy I think it’s best to keep the position smaller than normal (whatever that means to you), and to use a stop down in the mid-70s. It’s got some risk, but a powerful breakout could bring plenty of reward as well.

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