At this point in the overall bull market that began in March 2009, many stocks have made huge moves and have become rather obvious to the crowd. These obvious names can still work, and in fact, it’s usually true that the best part of the major uptrend occurs in the last 20% of the move—so names that have already had big runs and are still strong could have more in store should the market’s nascent rally continue.
An example here is Baidu (BIDU), which remains one of the top institutional-quality growth stocks in the market. Growth at the firm is truly astounding, and estimates call for more of the same for many quarters into the future. However, after a mega-advance during the past 15 months, it’s hard to say BIDU isn’t already known by most investors. That means there are more investors who will be willing to book some profit, which could stunt any advance.
Just to be clear, I like Baidu a lot and think it could easily have another leg higher, but to be fair, nobody can say the stock is in the second or third inning of its overall advance; more likely, it’s in the seventh or eighth, though we’ll let the stock decide.
In addition to monitoring extended leaders, now is the time to look for new leadership, or stocks that have been good performers during the bull move, but haven’t been the much-talked-about names. These stocks tend to have higher potential for the simple reason that most investors don’t already have a position … and thus, if business is truly turning around, lots of institutional investors will be piling in.
One such stock is Citrix Systems (CTXS), which gapped out of a good-looking base last week following a solid earnings report. Before this gap, the stock had been a decent performer during the bull market, more than doubling during the past year, but it certainly wasn’t on the lips of every investor. But now, thanks to its industry-leading desktop virtualization product, CTXS is acting well.
Even so, my beef with CTXS is that its current and projected growth just isn’t there—even after an analyst ratcheted up estimates, the bottom line is only supposed to jump 4% this year and 17% in 2011. Maybe those numbers are just way too low, but my own experience is that these great charts with so-so growth are not easy to handle, at least after they’ve gapped up.
Another idea isn’t a stock at all—it’s an exchange-traded fund (ETF) that tracks the MSCI Emerging Markets index (symbol EEM). Emerging markets, of course, were all the rage for much of last year, and EEM rallied from a bear market low of 19.5 all the way to 41.3 in October.
But then, the ETF effectively entered into a long consolidation phase—shares made a marginal new peak at 43 in January, but bobbed (down to 36 in February) and weaved (back up to 44 in April) and bobbed (down to 35 in May) and are now weaving again (back up to 42.5 this week).
The bottom line is that shares have been consolidating their huge 2009 advance for more than nine months, and I think EEM is ready to enter a new, sustained upleg. Backing this view is the action of commodity-related stocks, which tend to trade alongside emerging markets (China in particular), and are showing renewed strength.
My bet is that if the market rally is for real, EEM could be a leader among ETFs.