Newsletter Watch: Breakout buys
Leo Fasciocco, publisher of the Ticker Tape Digest, has an intriguing approach to stock selection. Like many advisors, he focuses on a company’s operations, earnings and sales, growth prospects, institutional ownership, insider buying and other fundamentals.
However, a unique aspect of his report is that he only recommends “breakout” stocks. For a stock to make it on to his “buy” list, it must either have broken above a technical resistance level, or be under strong accumulation and appear poised for an expected breakout.
He says that he expects these breakout stocks to be among the best performers during bull markets and strong market rallies. He does, however, caution that his strategy is most suitable for aggressive investors.
Using the same approach, the advisor also recommends short sales; in those cases, he is looking for stocks that are breaking below previous support lines. Overall, Fasciocco screens some 8,000+ stocks each day to find his long and short picks.
Currently, he rates the market’s short-term outlook (based on daily and weekly charts) as bullish, but considers the long-term environment for stocks to be neutral. As such, he says, “Bulls should be very alert now.”
Meanwhile, two small-cap stocks have recently shown up among his buys: Flow International Corporation (Nasdaq: FLOW), with a market cap of $355 million and Exponent, Inc. (Nasdaq: EXPO), which has a market cap of $448 million.
Flow International, he says, makes ultra high-pressure water jet systems. These systems, he explains, pressurize water up to 100,000 PSI and are used to cut and prepare surfaces in industrial applications, including aerospace, automotive and road maintenance.
For the upcoming fiscal third quarter ending Jan. 31, analysts predict a 130% jump in profits to $0.12 a share from $0.05 a year ago, he says. The advisor also sees the chance for a “mild upside surprise.”
“Analysts predict that FLOW's earnings for the fiscal year ending April of 2008 should surge 110% to $0.42 a share from $0.20 a year ago,” he says.
Looking to fiscal 2009 ending in April, he adds, analysts are expecting profits to climb 48% to $0.62 a share. He also notes that the stock sells with a 23 price-earnings ratio.
He points out that institutional sponsorship is “excellent.”
“The largest fund holder is 5-star rated Lord Abbett Small Cap Value Fund with a 3.2% stake,” he says. “A key buyer recently was 5-star rated Royce Opportunity Fund, which added 110,000 shares.”
Technically, he explains, FLOW had a “great run” up from 3 in 2005 to a peak around 15 in 2006. For the past year and a half, he says, the stock has been in a long-term consolidation pattern.
Now, he says, FLOW has rallied over the past few months, even while the stock market has acted bearish. With its momentum indicator bullish and a strong earnings outlook, Fasciocco considers the stock a turnaround situation, calls it “an appealing value-growth play.”
Exponent, he says, is an independent consulting firm devoted to the “investigation, analysis and prevention of complex problems of an engineering or scientific nature.” Its clients, he says, include transportation, manufacturing, utilities, energy and insurance companies, as well as government agencies.
Technically, he says that the stock has broken out “powerfully” from a 12-week flat base. The move was triggered by strong earnings for the fourth quarter.
“EXPO came in with net for the quarter up 43% to $1.25 a share compared with $0.83 a share a year ago. Revenues for the quarter jumped 37%,” Fasciocco says,
The company, he observes, benefited from the delivery of a rapid deployment integrated spy system to the Army.
For the current year, Fasciocco forecasts that profits will climb 20% to 25%. The stock, he adds, sells with a price-earnings ratio of 22, which is reasonable.
He rates the stock’s institutional support as “very good,”
“The top five fund holders all have a rating of 4-stars or better,” he says. “The largest fund buyer lately was UMB Scout Small Cap Fund, 4-star rated, which purchased 280,000 shares.”
Overall, the advisor says, “EXPO's technicals look good. The stock’s momentum indicator has turned back up in the bullish zone and its accumulation/distribution line is in an overall up trend.”
