To get clues about stocks with potential to go up, watch what the best-performing funds are buying and selling. MoneyShow's Kate Stalter looked at some holdings of a top-ranked small-cap fund, and whether or not these were in buy zone at the moment.
One method I use to get stock ideas is to examine the holdings of top-performing mutual funds from various categories.
A fund that I’ve been studying lately is the AllianceBernstein Small Cap Growth Fund (QUAKX). It has a four-star rating from Morningstar. The fund has shown good performance in the past three months, with industrials as the largest sector represented in the holdings.
A top holding from the industrials sector is Costar Group (CSGP), provider of real-estate information to brokers, bankers, and government agencies.
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The stock is up 25% year-to-date. It’s consolidating below its July 30 high of $85.77, getting support just above its five-day exponential moving average. It’s tended to move higher in fits and starts lately, gaining ground and then pulling back in a series of higher highs and higher lows.
The stock is currently buyable, until it rises about 2% from its five-day exponential moving average, at which point it would become too extended. The company has a market cap of around $2.4 billion, but it’s on the thinly traded side, moving only 159,000 shares per day.
Another holding that’s classified as an industrial is actually from the services sector. TrueBlue (TBI), a temporary staffing firm that specializes in blue-collar jobs, has been forming a potential base below its five-week high of $18.22, reached in April.
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This is a very small company, with a market value of only $634 million. About 200,000 shares change hands per day, on average.
The fundamental case for TrueBlue is excellent, although traders and investors still need to be patient as the stock works its way through its consolidation. The company has amassed a track record of double- and triple-digit earnings growth over the past two years. Revenue has grown at double-digit rates during that time, a good sign.
However, the technicals are not ready for prime time. Though the stock has been attempting to climb up the right side of its base lately, the moving average action still leaves something to be desired.
TrueBlue’s 50-day moving average has been headed lower, and is currently beneath its 200-day line. The shorter-term lines, the five- and 15-day exponential averages, are higher than the other averages. That type of inversion is not typically bullish, so I would avoid making a purchase until some of these technical indicators improve.
|pagebreak|The AllianceBernstein Small Cap Growth Fund is also heavily weighted in technology. A key holding is DealerTrak (TRAK), which makes software that connects auto dealers with financers.
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This stock recently pulled back from a four-year high, with the low of its consolidation undercutting the trough of the prior pullback. That kind of technical action is often bullish, as it flushes out investors lacking conviction and sets the stage for value-oriented investors to grab more shares.
It’s now forming a possible handle area to the larger consolidation. It’s currently trading below its short- and longer-term moving averages, so it’s not buyable. I avoid buying stocks that are under selling pressure, preferring to wait until it shows signs of accumulation.
There’s a red flag when it comes to the revenue: Growth rates have been slowing over the past three quarters, and came in at 8% most recently. Earnings are seen coming in 7% higher this year, at $1.09 per share. In 2013, that’s expected to increase to 20% growth, with analysts eyeing earnings per share of $1.31.
Another tech holding is Aspen Technology (AZPN), which makes supply chain and process management software for industrial use.
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The company reports its fourth quarter on August 21, after the close. Analysts anticipate a loss of 4 cents per share on revenue of $62.34 million. The company reported yearly losses in 2010 and 2011. It’s seen losing money again this year, but narrowing that to 6 cents per share versus last year’s shortfall of 45 cents per share.
Revenue has continued to grow at double-digit rates, and that is sometimes enough to propel a stock higher, as long as losses don’t exceed views, and if analysts see potential for a turnaround in the coming quarters. In fact, the company is expected to swing back to profitability in 2013.
The stock slipped beneath its 50-day line on Monday, but was attempting a rebound early in Tuesday’s session. This is a name that has some potential over the longer term, but for now, it’s a better watch candidate than buy candidate.
At the time of publication, Kate Stalter did not own positions in any of the stocks mentioned in this column.
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