Originally Posted by
MTman
Mike,
The Internet Content group has some strong stocks that are all basing (as I know you are aware). From my anaysis the 3 top stocks are QIHU, FB, and YY. They each have corrected about the same amount and have solid CANSLIM fundamentals. How do you determine which is the best growth stock to go with in this type of scenerio? Does the first stock that breaks out in big volume typically mean it will be the strongest of the group?
Thanks so much,
Mark
Mark,
The internet content group has been steadily rising amongst the 197 IBD industry groups. It is currently the third ranked group. A week ago it was number 4, 3 months ago it was number 10 and six months ago it was number 26. There are 46 stocks in the group. With a group that has been a leader for a long time I would expect to find some tired leadership; it is important to find stocks that are not extended or exhibiting wide and loose technical action. However starting with fundamentals first my ranking is as follows:
SFUN, FB, QIHU, YNDX, GOOG, BCOR, YY
I include in my fundamentals Liquidity (Avg $ traded per day), Demand/Supply (percent of float traded per day on average) and margins (either ROE or pre-tax margin). BCOR is a bit illiquid for me. YY is acceptable but at the bottom of my list because its margins are not as good as the others. Now on to each stock:
SFUN is acting very strong, shows high margins and strong earnings and sales. High volume has recently entered this stock. Currently 4.6% of the float changes hands every day. Anything more than 3% is high demand, anything less than 1% is low demand. SFUN unfortunately is very much extended above its last 2nd stage base. So the best I can say is that it bears watching for a future low risk entry, perhaps after it establishes a new base. The reason you should watch even the extended stocks is that some of them offer a pocket pivot entry such as SFUN did last Monday where it busted through the ten-day moving average on volume higher than any down volume day in the prior ten days.
FB shows accelerating earnings and sales, its ROE is minimal but its pre-tax margins are high at 44%. It trades 4.1% of its float per day on average. It is currently building a reasonably tight second stage base. The highest weekly volume in this base was a down bar but closed in the upper half of the bar which is actually a positive support sign. FB is attempting to bust through its 50-day moving average. This can sometimes offer a safe buy point if you buy close to the moving average and hold it as long as it behaves like you expect (stays above the 50-day). This is on my watch list.
QIHU has been acting very strong showing strong demand trading 5.1% of the float every day. It advanced 177% above its 2nd stage base and to my eye is now acting loose. On a weekly chart there are no tight closes (bars where successive closes are within 1 or 1 1/2% of each other.) Loose action is a sign of institutional indecision or outright selling. Perhaps QIHU needs to work off that 177% advance for a longer period. Loose action is a major flaw and I will stay away from it until it tightens up.
YNDX (I own this with the recovery of the 50-day) is forming a reasonably tight 2nd stage cup base. It trades an average 1.2% of the float per day and has good margins. YNDX preferably should form a handle before breaking out. Some stocks blast out of a cup without forming a handle. Success rates for cups with no handles are worse than cups with handles and late in a market cycle the percentages are no greater than 50-50. Early in a new bull market most of them work.
GOOG is really here because of its strong liquidity, institutional sponsorship, good chart action and good margins. It is not a pick that I like however with choppy earnings. It is acting very tight however which demonstrates institutional buying. GOOG might be a better pick than the loose acting QIHU however.
BCOR is a bit thinly traded. It trades $18.6M per day on average. This is light for many institutions and perhaps because of this it trades only 1.4% of the float per day. It has been acting well however. It is quite extended from its last base breakout and probably needs a rest and a new low probability set up.
YY shows strong earnings and sales growth. Its ROE is minus 72.3% but countering this is a 26% pre-tax margin. Of all the candidates it shows the highest demand/supply trading 11.2% of the float per day. Its float is tiny at 16.3M shares. YY has the same problem as QIHU, it went up 172% above its last 2nd stage base and is now acting very loose. Notice on a weekly chart that each bar closes significantly up and then down on each successive week. This is the opposite of what we want. To be fair the last three closes have tightened up some but much more of this is needed. Take a look at its first base formed early this year. Notice how that base looks compared to what you see now. I will avoid this for a while.
Now what about the market? We had a Hindenburg omen on Friday, an indication of a mounting number of new 52-week lows being formed in an advancing market. This is the kind of action that can accompany market tops. I know that every bear has been slain over the last year but this may be an indication of excessive complacency.
Mike Scott
Cloverdale, CA
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