For many investors, May 4, 2011 marked a key turning point for
stocks. On that day, the Dow Jones Industrial Average plunged more
than 100 points. This also happened on four different occasions in
that same month. Most stocks have been unable to withstand such
blows and have been trending lower ever since. In fact, less than
20% of all stocks are up since early May. Of these, only a select
group of stocks has been able to post outright rallies, rising more
than 10% in the last month alone.
Moving up when the market is moving down is often a harbinger of
continued strength to come. So it's advantageous to look into these
"whistling past the graveyard" stocks closely. If and when the
market stabilizes, these stocks have great potential to break out.
I ran a screen to see what kinds of stocks are rallying right now,
excluding any companies that have recently received
offers and any stocks that are worth less than $500 million. A few
sectors are showing real strength. For example, the for-profit
education sector, which had been pummeled in 2010 in the face of
increasing Congressional scrutiny, has been showing new life
recently. Stocks like
Bridgepoint Education (NYSE:
Education Management (Nasdaq:
ITT Educational Services (NYSE:
have all rallied higher in recent weeks as quarterly results have
not been as bad as many had feared. Despite the rally, Bridgepoint
and ITT trade for less than 10 times projected 2011 profits, which
could be the
to attract value investors.
The electronic retail sector has also shown resilience in this
. After falling from $30 last June to $17 in February 2011, I
of electronics retailer
were too cheap
. In fact, they got a lot cheaper, falling all the way down to $12.
Yet a turn appears to be at hand. Shares rallied more than 10% on
May 26 on the heels of a solid
, and are now back up above $14.
The electronics retailer has been opening new stores at a fast clip
(the store count now stands at 175, up from 130 a year ago), and
these stores are yielding good
off of the company's
. Shares trade for about 11 times projected fiscal (March) 2012
profits. I expect this stock to finally move back into the $20s
when investors see a few more quarters with strong results. This
should underscore the view that a company capable of 15% annual
growth is worthy of a profit multiple of at least 15.
PAETEC Holdings (Nasdaq:
This provider of fiber-based Internet-traffic management has put
investors on a rollercoaster ride. Shares fell more than 25% from
mid-February to late March (as the broader market was rising), and
then rebounded more than 40% since then (as the broader market
began to slump). The recent rebound comes as investors finally
glimpsed profitable results following a recent
Handling web traffic for large enterprises can be quite a
challenge. Companies serving the industry need facilities located
along major access points of the Internet backbone so they can
offer clients an end-to-end data transmission network. Thanks to a
series of deals during the past few years, PAETEC now controls a
fiber-optic network more than 10,000 miles long. It's the
fourth-largest network in the country behind only
Level Three Communications (Nasdaq:
Time Warner Cable (NYSE:
Cogent Communications (Nasdaq:
. PAETEC's data centers now control 320,000 square feet of space,
putting the company among the industry's top five in this metric as
from those bigger players (as well as incumbent phone companies
), PAETEC has sought to differentiate itself by offering a range of
value-added services. Business intelligence software, hosting
services and industry-specific software used in industries like
energy and utilities are among the new services offered.
With the acquisition spree largely complete, PAETEC appears
committed to proving its capabilities in terms of cash-flow
generation. The company generated $91 billion in
before interest, taxes,
) in the first quarter of 2011 (up from $65 million a year
earlier), and is on track to generate roughly $400 million in
EBITDA this year, according to analysts. This would represent a 50%
jump compared with 2010 levels. Dougherty & Co. recently
initiated coverage on PAETEC with a $6.50 target price, which is
roughly 40% above current levels.
Action to Take -->
These recent breakout stocks had struggled earlier in the year but
appear to be finding their footing now, even with the broader
market still in a funk. Keep a close eye on these stocks. A stable
market should help these shares to power even higher.
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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