Via homard.net, Kevyn Jacobs & A Healthier Michigan
Tuesday saw a market sell off, as the Dow Jones index slumped 1.1%, the S&P 500 dropped 1.2%, and the NASDAQ fell 1.8%, with financial shares seeing relentless selling pressure from investors.
Will the market start to see a deep correction? It is hard to tell right now. However, the market is overdue for a pull back, and investors will likely come up with many excuses to sell. The index’s normal retreat from a new high is healthy for a secular bull market. Some investors are worrying about the weaknesses in Dow Jones Transportation and small shares indexes. During past twenty-five year periods, both indexes were not consistent leading indexes, at best the secondary market indicators. The primary indicators are the markets themselves – the NADAQ and S&P 500 indexes, both of which have not signaled big trouble ahead yet.
Unlike a horse race, investing is a totally different performance game. In a horse race, after you pick a potential winning horse, you can only watch how the horse runs the course itself, while unable to control the horse race. Investing requires three key attributes: how to pick winning stocks, how to hold, and how to take profit.
It may not be so difficult for investors to find winning stocks in a bull market. Almost any stock you pick will move up, just like shooting a gun in a pond full of fish. However, knowing when to fold will determine who gets the last laugh. Five years ago, a retired engineer bought three-dimensional stock Stratasys, Inc. (SSYS) at bottom prices. His return on the stock was once over 2000%. But he did not take any profit, riding the roller-coaster all the up and down—a regretful lesson for any investor.
In February, I mentioned four stocks for post earnings drift play: TAL International Group (TAL), Mercury Systems Inc. (MRCY), Alibaba Group Holding Ltd. (BABA), and Western Digital Corp. (WDC).
TAL and MRCY each so far has climbed over 20% from the time I commended, and it is time to take partial profit, although I believe that TAL and MRCY could hit $120 and $50, respectively.
Both BABA and WDC have not moved well… it’s time to sell them and move on. Two stocks came to my attention recently: Applied Optoelectronics Inc. (AAOI) and National Beverage Corporation (FIZZ). Both have solid fundamentals.
AAOI price has doubled in two months from the latest buy point of $27.38, forming a rare flag pattern. Investors can take advantage of recent weakness to add or buy in shares. AAOI prices may double again, reaching the $100 mark. FIZZ has risen over 20% in three weeks, above a previous peak price of $62.91. Normally, when a stock price soars so much during a short period of time, it should be held a little longer. In fact, compared with former super stock Monster Beverage Corp (MNST), FIZZ is undervalued.
MNST market cap is $26.5 billion, six times larger than the FIZZ market cap of $3.7 billion, while the MNST revenue of $3.37 billion is only 2.5 times higher than FIZZ revenue, at $956 million. MNST shares trade at 27.5 times of 12-month earnings forecasts, a little lower than National Beverage Corporation’s P/E of 28.6. However, FIZZ earnings will next year grow at 15%, much higher than MNST’s 10.7%. Could National Beverage become another Monster Beverage, which has delivered 40000% return since 2004? No one knows, but FIZZ price action seems to be heading toward $120 or higher.
This is just a personal opinion, and personal opinion is often wrong. Currently, the author has no position on any of the above mentioned stocks, and may or may not build any position on any stocks above in the future.