I don’t think there are any exceptions to this rule.  None.  And if there were, I’m betting that the SEC would probably want to have a nice, long chat with whoever found it.

So my idea for today’s stock is a bit of a compromise.  It isn’t the hottest Chinese stock on the market.  But neither is it a boring Red Chip stock that you have to hold for years to get a good return.

The company is Mindray Medical (MR), which surely has one of the best company names ever.  This Chinese manufacturer of medical devices started out in 1991, making knock-offs of ultrasound and other medical imaging machines.  It took 10 years, but the company concentrated on R&D, and kept finding small, patentable improvements to existing technologies.

It used to be that the only markets for Mindray’s machines were the smaller regional and local hospitals and clinics around China.  But the gradual improvements in both quality control and design coupled with inexpensive Chinese labor soon made the company’s devices attractive to international customers.

Today, China accounts for just 43% of Mindray’s revenue, with the U.S. contributing 16%, and 41% coming from the rest of the world.

Patient monitoring and life support systems are the biggest product line, bringing in nearly half of the company’s sales.  Imaging systems and in-vitro diagnostic products each contribute about a quarter.

Mindray is a great example of a well-run company that has raised itself out of the low-quality, low end of the medical device market.  By spending the money to create intellectual capital, the company has broadened its market.  Q2 results showed a gain of 10% in both revenues and earnings, and the recovering global economy will likely bring back the much bigger gains that characterized 2007 and 2008.

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The chart for MR shows an attractive six-week base at 31 and signs of a breakout in recent days.

All the major indexes are strong.  The Advance-Decline Line is strong.  The number of stocks hitting new lows is minuscule.  And stocks in general do not appear overbought, meaning that while a short-term correction is possible at any time, we do not appear to be at a climax phase.  In short, the charts look great.

As to psychology, the temperature is rising, but there are still doubters, and we are far from euphoria.  So there is plenty of upside left, which means that if you’re still not aggressively invested in this market it’s not too late.

One of my favorite investment areas, because of its growth rate, remains China … and one of my favorite stocks, mentioned above, is “the Google of China,” Baidu (BIDU).

The best coverage of the stock has come from Cabot China & Emerging Markets Report, which back on July 9 said this:

“Baidu is the dominant Chinese-language search engine in China, with a market share that hit 65.8% in 2008.  (Google was second with 22% and Chinese rival Sogou was a distant third with 2.9%.  Yahoo! was an even more distant fourth.)  It is now the third-largest search engine in the world.  For a company incorporated in 2000 and limited almost entirely to operations within a single country, this is a remarkable record. …

“Baidu has built its towering advantage over its powerful competitors by being both imitative and innovative. The imitative part of the Baidu strategy is its total adoption of Google’s paid keyword search as its revenue model.  … The … innovation … has been understanding the Chinese language better than its competition.  According to the language mavens at Baidu, the Chinese language has 38 ways of saying “I,” and an equally bewildering profusion of terms for other topics of interest.  By incorporating a native speaker’s intuitive grasp of the poetry and ambiguity of this rich language, Baidu can deliver the results users want no matter how oddly they may ask for it. …

“Baidu’s future growth is expected to come from the growth of the Internet in China.  Despite the controls and restrictions demanded by the Chinese government–mostly aimed at pornography and politically sensitive topics–the Chinese people are taking rapidly to life online.  China now has more people online than any other country in the world (221 million in early 2008) and estimates put the growth rate at 18% per year, with a target of 490 million users by 2012.  (We note that that’s more Internet users in China than there are people in the U.S.) …

“As usual, don’t let the stock’s high price put you off.  Remember that $1,000 invested in BIDU is exactly the same as $1,000 invested in a stock trading at 10.  It’s the exposure, not the number of shares that matters.”

When that was written, editor Paul Goodwin’s China-Timer, which monitors the health of the Chinese stock market, told him to be cautious, so he rated BIDU a hold.  But just seven days later he wrote to subscribers, “The combination of a new buy signal from the Cabot China-Timer and a breakout on good volume makes this an easy call.  BIDU is now rated buy. The stock failed just above 300 in June, then stalled there again in the first week of July.  A six-day high-volume rally pushing past that old resistance is just what the doctor ordered.  BUY.”

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Since then, the stock has soared 24%, and now it’s building a base at 400.  Of course, this seems like a ridiculously high price to some investors, but it’s clear to me that the folks at Baidu have taken another lesson from the Google playbook.  They’ve learned that leaving your stock’s price high (instead of splitting the stock to artificially bring it down to a level attractive to the masses), means that more shareholders will be institutional investors who (hopefully) will treat the stock more wisely.

BIDU’s 50-day moving average is now at 350 and climbing, and if you wait until the stock and that moving average meet, you could find a decent entry point.

To me, those types of patterns aren’t overly reliable; sometimes they work, and sometimes they don’t.  Instead of trying to predict the future, I prefer to use charts to help with simple supply-and-demand analysis–I look at price and volume first, and everything else second.

With all that said, there is a tenet of technical analysis that is worth remembering:  The longer the base the longer the race.  (The corollary, by the way, is:  The longer the top the longer the drop.)  That’s just a cute way of saying that if a stock, sector or the market as a whole consolidates in a range for a very long time, and then powerfully breaks out of that range on the upside, it’s usually ready for a big run.

The most obvious example of this was the stock market itself back in 1982.  For more than 16 years, the Dow Industrials were stuck below the 1,000 level.  But when the market got going decisively in 1982, it ushered in a long-term bull market that didn’t hit its zenith until 2000.

But most bases aren’t going to last 16 years, and even if they did, who would notice them?  So, when I look at long bases, I’m usually looking for stocks or groups that have gone nowhere for more than a year and have totally worn out the weak hands and the public’s eye has moved elsewhere long ago.  That way, when the buyers truly step in, there is no supply (no ready sellers), resulting in sharply higher prices.

These days, following the 2008 wipeout, there aren’t many long-term bases to speak of; most stocks are buried well below their multi-year peaks.  However, one group has recently broken out of an 18-month base, and I think it has lots of potential.  I’m talking about gold and gold stocks.

I traded in my Avalon for a 2009 Toyota Matrix, a car I’d been coveting since my cousin got one a few years ago. It’s much smaller but with a hatchback that provides excellent cargo space and it gets better gas mileage.

According to Toyota, the 1998 Avalon gets 19 miles per gallon city and 27 miles per gallon highway, not bad for such a large car. But the Matrix gets 26 miles per gallon city and 32 miles per gallon highway, a fact that pleased me greatly since I drive about 23 miles to work each day (and 23 miles back), mostly on the highway.

(I know a Prius would have been REALLY environmentally friendly, but I love taking road trips and the trunk space was just not sufficient.)

At the time, there was no such thing as the Cash for Clunkers program that’s available now. My Avalon wouldn’t have been eligible anyway, as it comes in well above the 18 combined mile-per-gallon qualifying mark.

In case you haven’t heard, Cash for Clunkers, now called CARS, for CAR Allowance Rebate System, is a program run by the U.S. Department of Transportation that people driving old, gas-guzzling vehicles gives a cash incentive to trade them in for new, more fuel-efficient ones.

Basically, all you have to do is go to the program’s Web site, http://www.cars.gov, find out whether your vehicles qualify and if they do, you can either get a $3,500 or $4,500 discount for your trade-in vehicle. As the Web site puts it, “The program is designed to energize the economy; boost auto sales and put safer, cleaner and more fuel-efficient vehicles on the nation’s roadways.”

Well the program, which is supposed to run from July 1 to November 1, has been such a hit that it has already run out of funding. Congress has just added an additional $2 billion to the nearly depleted $1 billion the program started with.

This week, President Barack Obama said that about 300,000 vehicles have already been purchased through the program and urged Congress to extend the program to keep up with surging demand from eager car buyers.

(According to CNN Money, the 10 most popular vehicles purchased under the program so far: (1) Ford Focus; (2) Toyota Corolla; (3) Honda Civic; (4) Toyota Prius; (5) Toyota Camry; (6) Ford Escape; (7) Hyundai Elantra; (8) Dodge Caliber; (9) Honda Fit; and (10) Chevrolet Cobalt.)

The plan actually seems to be one of the better ones the U.S. government has come up with over the years, and the fact that it was put into action so quickly makes it even more impressive.

The skeptic in me says that the boost to the auto industry amid a terrible recession is probably more important to Congress than the benefits to the environment. But if it can help jump-start the economy, while taking some of our many gas-guzzling vehicles off the road, I think the program will be worth it.

(I did love my new car very much until Thursday morning when I went outside to go to work only to find my car was dead, dead, dead. No battery power after three jumps and no electrical power at all. After a call to AAA, two tow trucks and a trip to the Toyota dealer, I learned that I probably need a new computer for my year-and-a-half old car. The good news: This will be covered under my warranty. So until it gets fixed, I’m tooling around town in a brand-new Toyota Corolla. It’s nice car and I’d recommend it to anyone thinking about trading his or her car in under the Cash for Clunkers program.)

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Many of our editors have warned against investing in auto industry stocks that were hit especially hard in last year’s bear market. But, there are a few names in the sector worth discussing and one of them, Tata Motors (TTM) has been featured here before a few times.

Here’s what Timothy Lutts wrote back on May 18 about the company:

“Back on May 7, soon after General Motors announced that it had lost $6 billion in the first quarter, I wrote the following in Cabot Wealth Advisory:

“There is, however, one auto stock that’s intriguing.  It’s Tata Motors (TTM) of India, with $9 billion in revenues over the past 12 months.  Tata acquired Jaguar last June, and we were impressed to read early this year that the top marques in the J.D. Power quality rankings were Jaguar and Buick.  And now Tata’s come out with the $2,500 Nano, a car designed for the masses of India that has the potential to succeed like the original “people’s car,” the Volkswagen Beetle.  Tata has already received 203,000 orders, including deposits of–brace yourself–77% of the selling price.  The first cars will be available in July.  And Tata pays a dividend of 4.5%

“Furthermore, TTM has an attractive chart.  After the market bottom of early March, the stock bounced from 3 to 8, and over the past four weeks it’s built a very nice and tightening base under 8, apparently building steam for a breakout into new-high territory and another advance.  I think the odds are pretty good.”

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“After that, the stock continued to trade tightly between 7 and 8.  This past weekend the Indian elections were concluded, and today all Indian ADR (American Depositary Receipts) soared.  Tata hit 9.74 and then pulled back a bit.  I still like it, long-term.”

TTM pulled back a little after that, but found support around 8. Since then, the stock has been motoring ahead, recently closing near 12. So even if you don’t have a car to trade in under the Cash for Clunkers program, you can still buy a piece of the fuel-efficient vehicle pie.

But I couldn’t help noticing when, on a major news Web site the other day, I saw the headline “Once-trendy crocs could be on last legs,” with a subtitle that read “100 million foam clogs were sold in 7 years, but the firm is now in trouble.”  It made me a little sad … but also reminded me of a couple of the most important lessons for investors.

Crocs (CROX), the company, always seemed to be the butt of many jokes.  After all, the company simply made “plastic shoes,” and their traditional clogs were generally very ugly–bright yellow, pink or orange, among other colors.  By 2006, knockoff shoes were already hitting the market.  I honestly don’t know anyone that really loved Crocs; at best, most people thought they were cute for little kids.

Amid this sentiment, we recommended the stock in October 2006 at a price of 16.

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Why?  Well, here’s where the first lesson comes in:  Know what characteristics really count when picking a stock, and which ones don’t.  In terms of what counts, you have sales and earnings growth (both were growing at triple digit rates for CROX), institutional sponsorship (Fidelity had recently bought a chunk and the stock had built a great launching pad), big margins (18.3% in the second quarter of 2006), a high return on equity (57% in 2007) and a huge mass market–there were potentially tens of millions of customers around the world.

Criteria that DON’T matter include what everyone thinks of the company.  In fact, there’s usually an inverse correlation with young growth stocks’ performance, and common perception among investors–the more it’s hated, the better the chance it has to become a big winner as those early doubters eventually change their minds.

And many did just that, as CROX soared from 16 to as high as 75 within the next year.  It was a good bull market, but this one was one of the best glamour stocks out there, rewarding early investors in a big way.  We sold a third of our shares that June around 45, but held the rest until we saw clear signs of a top.  That sign came on November 1, right after the company reported earnings.

On its earnings news–which, by the way, was terrific, with sales and earnings up 130% and 144%, respectively, well ahead of estimates–the stock plummeted, falling 36%.  In one day!  After a heady advance, that was a clear signal the run was over.  We sold all our shares the next day.

Of course, with CROX down that much in such a short period of time, and on “good” news, most investors had trouble selling their shares.  And that brings up another lesson–every stock, no matter how good the story, is going to top out.  Every single one!  When these leaders top out, on average, they fall 70% from their peak before bottoming.  That is a historical fact.  As it turns out, CROX went straight down after gapping lower, eventually falling to 80 cents a share!

All of this leads to last week’s article, which stated that Crocs lost a whopping $185 million last year (I think that included some charges), laid off 2,000 workers and had to scramble to find ways to pay off its debt.  Even now, Crocs’ future is in doubt; sales were down 32% last quarter, earnings were a negative 27 cents a share, and the stock, now just above 3, is still down 95% from its all-time high.

Now, I’d be lying if I told you I predicted CROX would fall so far, so fast.  What happened to the company, however, wasn’t unforeseen–many times consumer product companies that experience explosive growth end up expanding way too fast.  And when things hit the fan, it turns out the company has too much inventory, too many employees and too much cost everywhere.

However, the trick is not to jump the gun.  In the case of Crocs, many of the early bears of the stock were eventually proved right … but in reality, where did that get them?  The stock quintupled during its bull run before it collapsed.  And that leads to the most important lesson of all–have a sound system of rules and tools to guide you in the marketplace.  Without them, not only might you miss an opportunity to own a stock like Crocs on the way up, you might get in way too late and hold it on the way down.

As for CROX today … forget about it.  The stock might rally if the market does, but its glory days are long gone.