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Friday June 01, 2012
8 stocks to watch: Tennis balls & eggs
by Mike Cintolo, editor Cabot Market Letter  The concept of eggs and tennis balls helps us form our watch list during market downtrends. The idea is simple — the key to finding winners is to look for stocks that bounce back quickly; we call those tennis balls. Conversely, it’s usually best to avoid the names that can’t get off their knees even after the market lifts its head, as their inability to bounce resembles eggs that have splattered on the floor. The reason we like tennis balls is because of history; time and again, the stocks that either hold up best during a decline and/or bounce back the quickest most often become future leaders. Too often, we see investors buying up a bunch of eggs once the market confirms a new uptrend. Some of that is due to bargain hunting (“if it was a good buy at 50, it should be a really good buy at 40!”), while some of it involves bias, as many investors go back to an old leader because of its name, even though the stock may have lost its luster. While every now and then eggs will go on to be good performers, most of the dynamic performers are tennis balls that show their hands during the market’s bottom-building process. Now, you need to wait for a new market uptrend before stepping into a potential leader in any big way because good stocks can still go bad in a hurry in a downtrending market. But the more you focus on resilient stocks, the better the chance you’ll land a big winner when the bulls re-take control. There remain plenty of resilient stocks, though a bit more time would be nice, giving them a chance to round out launching pads. Here's a watch list of stocks we’re following closely: Amazon.com (AMZN) — The Wal-Mart of the Internet, Amazon has $50 billion in annual revenue but is still growing at 30%-plus clips. A huge investment spree could be near an end, leading to a big increase in earnings. Athenahealth (ATHN) — We’ve always liked the story of this company’s billing, collections and electronic health record software that’s increasingly popular — ATHN’s revenues are consistently up 30% or more. The stock is thinly traded, but it’s formed a tight 10-week zone south of 80. Buffalo Wild Wings (BWLD) — We were shaken out of BWLD a few weeks back, but the stock has been etching a decent base since. Wing prices (and, hence, profit margins) remain an issue, but the firm is hiking prices in response, and its big-picture cookie-cutter story remains enticing. LinkedIn (LNKD) — The Facebook of the “business” community, LinkedIn is monetizing its millions of users by allowing companies to search for the best talent whether they’re looking for a job or not. Triple-digit sales and earnings growth. Salesforce.com (CRM) — The more we study Salesforce.com, the more it looks like the Microsoft of the Cloud generation; its quarterly report two weeks ago was another blockbuster. The stock has been basing since December 2010, and a couple more weeks of consolidation could set the stage for its next leg up. SourceFire (FIRE) — Network security is growing more complex, and SourceFire is a small ($181 million in sales) firm that has some of the best products in the industry. Sales and earnings growth are both accelerating, and the stock is acting well. SXC Health Solutions (SXCI) — SXC has morphed from a small, regional pharmacy benefit manager to a national provider, thanks to rapid growth and a few acquisitions — the most recent (of Catalyst Health) could be a game-changer. The stock has traded tightly during the market’s correction and is near new-high ground. TripAdvisor (TRIP) — TripAdvisor is the world’s most visited travel information site with 60 million reviews and opinions. The stock was spun off from Expedia last December, but it’s well-traded ($90 million per day) and hit new highs last week. Learn more about this financial newsletter at Mike Cintolo's Cabot Market Letter. Related articles: 
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