GNC Is Worth Watching After Recent Failed Breakout

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Quality IPOs should stay on an investor's radar screen.

Initial public offerings with strong fundamentals can become big winners. So a misstep shouldn't lead an investor to dismiss a stock.

Sports nutrition chain storeGNC Holdings ( GNC ) debuted in April 2011. The stock delivered some big gains, but the most recent breakout failed.

In early July, GNC cleared a 42.05 buy point in a tentative fashion. The stock had trouble closing above the buy point, and big volume came just before but not on the breakout. GNC dropped more than 7% below the buy point July 10 and retreated as much as 12% under the entry Thursday.

Anybody who bought on the breakout should've sold no later than when the stock was 7% to 8% below the entry.

When a stock fails, some investors take it personally. They will harbor a grudge against it. Yet, if a stock regains its 10-week line in strong volume, an investor should buy the stock back.

IBD founder and Chairman William O'Neil discusses such a development in "How to Make Money in Stocks" on page 19. In 1926, IBM broke out of a base and failed. Then the stock rebounded. The book notes: "Very important: After shakeout, if stock comes back up through 10-week line on even greater volume, you must buy it back!"

GNC has yet to do that, but it's worth watching.

Earnings advanced 26%, 37% and 64% in the past three years. Revenue stepped up 3%, 7% and 14% in the same years. The Street expects GNC to grow EPS 38% this year on a 15% increase in sales.

Return on equity, a gauge of financial efficiency, hit 20% last year, above the 17% minimum associated with elite stocks. Pretax margin was 12%, a nine-year high.

The number of funds holding shares increased from 201 to 280, 363 and 399 in recent quarters.

GNC's new factor might be demographics. About 43% of its customers are 35 or younger and 80% are under 55. Since a quarter of the U.S. population is 20 or younger, GNC could benefit as that generation rises.

The dividend yield is 1.1%. The company paid its first two quarterly dividends in March and June.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Investing Ideas

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