Anyone who's been trading for the last six months or so knows
that we've had a lot of correlation, with stocks following the
indexes and sectors almost in lockstep. While this is classic
bear-market behavior, the good news is that we could be near a
breaking point where stock picking makes sense again.
We got a glimpse of that last Monday when Germany's SAP agreed to
pay a massive 52 percent premium for software maker
. Here's a company, after all, that had solidly beaten estimates
and raised guidance for at least three straight quarters. Analysts
at Credit Suisse, Canaccord, and Morgan Stanley couldn't say enough
good things about it, but short interest was still more than 20
percent of the float. (We had also flagged the stock as a bullish
The doubters got a rude comeuppance, but their negativity is
symptomatic of this market. The underlying issue is a massive
flight into bonds that began in 2005 when the Fed neared the end of
its last rate-hiking cycle. Private pension funds led the charge,
followed by Main Street investors.
That left equities in the hands of index-following hedge funds and
ETF traders. These folks are also closely linked to changes in
currencies, which is why the S&P 500 often follows the euro.
Given all the money that should be in equities but isn't, it's only
a matter of time before investors return to picking individual
stocks rather than just playing the indexes. So this week, I want
to identify some areas where that process appears to have begun.
Each of these have outperformed the S&P 500 over the last six
months, but are all near their 200-day moving averages and seem to
offer good potential points.
Companies like Electronic Arts (ERTS), Take-Two Interactive (TTWO),
and Majesco Entertainment (COOL) each beat expectations the last
time they reported. Activision Blizzard (ATVI) also had good
earnings and guidance but faces worries about weakness in its
"World of Warcraft" title. The good news is that its new game,
"Call of Duty: Modern Warfare 3," seems to be picking up the slack
and then some. All four of these stocks also made higher lows in
October than August, which is bullish because the S&P 500 made
a lower low.
A satellite-television name in a steady secular uptrend as it
expands into foreign markets. It's spent the last year
consolidating at its previous all-time high from early 2000 and now
looks as if it's ready to continue into new territory.
This is a small-cap technology company that repackages software
from larger vendors such as Oracle. It's beaten estimates for the
last three quarters and trades at about 9 times forward earnings,
despite revenue growing at 30 percent and net income more than
tripling in the last year. It made a big move earlier in the year
but has been consolidating since then.
The bears seem to really hate this company, which makes accessories
for iPhones and other mobile devices. They keep betting that it
will drop and have pushed short interest is more than 40 percent of
the float. Nonetheless, it has beaten estimates and raised guidance
the last two quarters. It also had bullish call buying late in
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Dec. 7.)