Neutral Tandem (TNDM)

This provider of interconnection switches for telecom companies dominates its niche, allowing phone companies to avoid using major phone company switches and their heavy costs. The company is in a very sweet spot.

To prove it they’ve beaten estimates for at least 4 quarters in a row and have 6 consecutive quarters of triple digit year over year EPS increases on sales increases of 38 – 65%. These are the kinds of earnings numbers that drive huge gains in a stock. Given the brutal recession we have had they are hard to find in the current market.

TNDM is on the thin side. It has a float of just 17.4MM shares and a 50 day average of just $26MM a day moving through it. Because of this and the large number of institutional investors attracted to its gaudy numbers price has been extremely volatile, making it a difficult hold even for experienced traders.

But institutions haven’t demurred. 59% of the float is now held by mutual funds, according to numbers released at the end of June. And the number of funds holding the stock has increased in the last two quarters from 79 to 114 to 129.

Because of its volatility and because it hasn’t participated in the resumed rally TNDM hasn’t had the buzz it had earlier in the year. But it shouldn’t be overlooked. Trading has quieted down in both volume and volatility. The stock has put in a constructive 5 week flat base that seems able to support another significant advance. (We call TNDM’s base a flat one, even though the correction is 20%, generally too steep for a flat base. If we use just trading opens and closes the correction is a milder, more acceptable 11.5%.)

TNDM will report earnings in the premarket on Wednesday, August 6th. They are expected to report a 71% YOY EPS gain on a 41% increase in sales. A beat and raise could propel this out of its second stage base on another healthy run.

Any break out above the $31.50 resistance point on heavy volume prior to earnings should be viewed as an opportunity. (A slightly earlier entry point would be at a break of the trend line connecting the June and July highs around $31.25.) We would not be eager to chase a gap up after earnings given the thinness of the stock and its volatile history.

Some Thoughts on GMCR and Holding Through Earnings

People ask us all the time, “You hold stocks through earnings? Isn’t that risky?” The answer is yes. But so can be crossing the street. You try to do it when the odds are on your side. Trying to traverse the Cross Bronx Expressway at rush hour isn’t advisable. We try to avoid rush hour.

First, we only hold during market uptrends. And we only hold the very best performing stocks with a recent history of earnings acceleration and beats. And we like to have a cushion of profit, preferably around 10%. Our experience is that if you follow these rules the winners far outweigh the losers, and the damage on the losers is limited.

Last night one of our holdings that we've profiled on this page, GMCR, reported sales that were a bit light. But they guided higher for next quarter and next year. The stock was pummeled after hours.

One of our rules is that no matter how much your stomach turns you never EVER sell in the pre or post market. Liquidity can be limited and is often dominated by retail investors, the reaction of whom is often times the polar opposite of how institutions will react during the next session.

Sure enough the bullishness of the market has saved the day for GMCR. From a post market low print on our chart of $58.99 the stock has been over 10 points higher during today’s session.

Will GMCR continue to be a stock worth holding? We don’t know yet. It will depend upon the market’s continuing evaluation of its prospects. But for now it’s an ongoing hold as the market sorts things out.

Starbucks (SBUX)

Starbucks is the latest “coffee play” in a sector led by GMCR.

This is a turnaround story and while the company has stressed cost cutting efforts the market is a believer, gapping the stock out of an indeterminate formation on earnings last week.

Since that time price has traded tightly on diminishing volume. O’Neil considers that very bullish and suggests buying a volume break to new highs.

This morning we’ve got the move but volume is a bit light. The stock trades around 14MM shares a day and is on pace for less than that.

Given that the sector is in favor and the trading action in this stock has been so constructive you might opt to take some shares with a tight stop.

The Chinese Gaming Sector

We’ve profiled two stocks on this page. We endorsed Netease.com (NTES) and suggested avoiding Perfect World (PWRD). But the sector also contains Shanda Interactive Entertainment (SNDA) and recent Sohu.com spin off Changyou.com (CYOU).

Growth investors looking to get the most mileage out of a rally in a hot sector need to be attentive to the leader. That’s generally the stock that breaks out to new highs first and just keeps running. It’s the stock that frustrates the growing army of buyers that wait for a comfortable pullback. In the current rally that stock is NTES.

SNDA and CYOU have had difficulty making new highs, making them laggards. Even if they move higher later in the rally they are unlikely to post the gains that NTES will.

PWRD is a more difficult read. The weekly chart clearly shows a stock breaking to new highs out of a consolidation on volume. But the daily indicates a stock that has churned on volume at its highs. We suggested avoiding this stock originally because its pattern is sloppy, which is usually not supportive of a smooth, sustained advance. In our view the need to pursue PWRD is a moot issue in any event when NTES is the clear leader and deserving of your investment money on a pullback to the 10 MA (or 20 MA later in the rally when it inevitably occurs).

Of course the true Chinese Internet monster, beyond just gaming, is Baidu (BIDU), which we also profiled previously and suggested as an investment. Chinese stocks are leading the market and BIDU seems to be leading the Chinese stocks, up better than 20% to this morning’s peak from its break out point where we recommended it nine days ago. As with NTES, this is a buy on the right pull back.

Synaptics (SYNA)

This stock had been in a terrific uptrend off its December lows, nearly tripling to its June peak. But it has suffered a correction ostensibly because a minor customer, Samsung, is alleged to be working on becoming a competitor.

Whether this will have an impact on the company on some point or not clearly buyers are out there. A look at a weekly chart shows that two weeks ago the stock saw huge volume support off its bottom and ended the weekly trade unchanged. That’s bullish.

The company reports earnings after the bell on Thursday and this morning is gapping higher on big volume and running back above its still upward sloping 50 MA.

We’d take a position on this early pullback. We’d hold through earnings if the stock breaks above its downward sloping trend line connecting the recent highs. Suggested stop below today’s low.

Coinstar (CSTR)

Here’s another stock that’s embarking on gains for which its chart pattern seems well prepared. Price seems poised to move into the $29 - $33 range. As with PWRD, though, we’re not endorsing it for myriad reasons, which we’ll explain.

First the good. A weekly chart shows CSTR forming a tight three week bottom, with even weekly closes before moving higher on accelerating volume last week. This morning’s favorable story in the WSJ has launched it higher, completely out of the bottoming formation.

So what’s not to like?

First, CSTR corrected over 30% off its recent high. On the surface there’s nothing wrong with that. O’Neil’s study of winning stocks shows that price often corrects as much as 35% during bull markets before resuming an advance.

But therein lays the rub. Many stocks are already advancing out of patterns and into new high territory. They corrected far less than CSTR during the recent correction and are thus better bets for big gains, as they have cleared prior resistance levels and face no headwinds on their move into new high ground.

Also, if CSTR were to shoot straight up from here it would present us with a “V” shaped formation. These are notoriously failure prone. We would far prefer to see a more rounded recovery. But in the meantime there are all those stocks on the move now, without technical barriers ahead.

Our problems with CSTR run deeper than just technical objections. CSTR has wonderful projections ahead for the next two years, with 38% growth estimates this year and 72% next. This is because of their Redbox $1 DVD rental kiosk business.

But they have a spotty history of meeting analyst earnings projections. And this is a company that has posted lower year over year profits twice in the last three quarters. The lack of actual earnings acceleration will likely cap gains until the company can begin to perform.

Whatever happens we have profiled a number of stocks that are more likely to deliver big gains during the current rally phase than CSTR. Having said that, we remain intrigued by the story and will be watching when they report after the market on 8/4. We’ll see if they can begin to deliver on their promise.

Perfect World (PWRD)

This morning the stock is breaking out of the same type of pattern as STEC, which we profiled on this page last week: a high tight flag.

While it could work we’re not endorsing it.

Notice how STEC traded tightly during its consolidation and how volume dried up. That’s a sign of institutional support.

PWRD’s high volume whippy trading is a sign that traders are all over it, not exactly the breed you want holding your stock if you are expecting large, non-volatile gains.

In the bullish environment we’re in anything can work on the long side, and PWRD, a Chinese gaming stock, is certainly in a very hot sector, so we’re pointing out the action for the adventurous.

For those wanting exposure to this sector our preferred vehicle is Netease (NTES), which we profiled last week. We also like BIDU, which we also profiled, for exposure to the broader Chinese Internet content sector.

Green Mountain Coffee Roasters (GMCR)

Also in the four bagger club in the current rally, this stock is on a lot more radar screens than other stocks recently discussed because of its spectacular advances, featuring an explosive gap up on 4/20.

This stock has not formed a buyable pattern and thus might not provide the explosive move of stocks that have either corrected for longer periods or in a tighter fashion. Still, price has rebounded off the 50 MA marking the first touch of this line in four months.

Volume is light today, which does not auger for an immediate move, but two things stand out this morning. First, price is edging above the trend line connecting the highs of the correction. And Stifel reiterated their SELL rating on the stock, which has reacted by trading higher.

In spite of myriad technical caveats listed above we’d be buyers on a volume move over this trend line, whenever it should occur.

Vistaprint (VPRT)

Here’s another big winner in the 2009 rally, nearly quadrupling off its bottom last autumn.

Price has formed a 4 plus week Square Box pattern. The most important feature is probably the absence of volume throughout the correction. Imagine, a stock quadruples and when it corrects there’s minimal volatility. Nobody wants their money back.

Last week the stock bounced off its 50 MA. It was buyable there. It’s buyable today as well, as it breaks above the trend line connecting the highs of the structure and moves above all resistance to new 52 week highs. Volume is on pace to be nearly double the 50 day average.

If you take entry here I’d recommend a larger than usual stop, down to around $43.50 to allow for a test of the trend line.

Netease.com ADR (NTES)

This consolidation might not be ready for prime time. It’s a double bottom in its 6th week. O’Neil says it needs to be 7 to be valid.

But he also says to be flexible and given that Chinese gamers were perhaps the most potent group in the spring’s uptrend we might look to find a way into a stock that could well have further legs in a continuing market uptrend.

These stocks all have sloppy formations, something we don’t like to see (see SNDA, PWRD, CYOU). The shakeout in them in early July came on new Chinese gaming regulations that are still ill defined. But price in NTES seems to have found its footing.

We were tempted to take early entry yesterday when the stock broke above $35 resistance, but volume was lacking. That’s not the case today as volume is on pace to be comfortably above average.

Using O’Neil’s 13% rule described in our WMS write up yesterday we’ll take a position in the stock here with a stop under $36.10. Alternatively you can wait for price to take out its intraday high using the same stop.

Baidu ADS (BIDU)

The “Chinese Google” had one of the more impressive uptrends in the current rally, more than trebling off its bottom late last year.

Since early June price has been forming a buyable consolidation that O’Neil refers to as a Square Box. This morning price gapped over a trend line connecting the recent highs, serving as an initial buy point. It then passed an additional inflection point at $305.80 resistance. It has yet to clear its recent highs of $310.25, which represents yet a third valid buy point.

An earnings date for BIDU has not yet been confirmed but is tentatively scheduled for 7/22 PM. The company only met estimates last quarter and missed by a dime the quarter before.

But I prefer to trade what I see and what we are witnessing is a rush of institutional money into a stock that is in the process of launching another leg higher. Whether or not it succeeds depends on the market, of course, but recent action has to bolster confidence.

As we come into midday I might consider trying to buy on a constructive pullback. Alternatively a move past $310.25 might be worthy of taking a smaller position.

W M S Industries (WMS)

According to analysts casino game maker WMS is on pace for yet another quarter of 30% minimum year over year EPS growth. They’ve pulled this off for 5 quarters in a row, and the 2 before that featured growth in the high 20’s.

Price has formed a constructive double bottom base. Today it has passed a key resistance point at $32.56 on above average volume.

Although it is common wisdom to buy a double bottom on a high volume break of the W, it is very difficult to buy and hold a break out in this manner because double bottoms by their very nature do not form the kind of lengthy and tight bottoms we saw on NFLX that are durable enough to sustain an uninterrupted advance. This often leads to volatility around the mid point of the W.

O’Neil suggests a better buy point is roughly 3 points above the low of the first leg of the pattern provided price passes this point on volume. For WMS that would be $32.60, which conveniently dove tails with a resistance level on the chart. I didn’t mention this setup previously because yesterday’s break was low volume and failed and the advance today was initially on lighter volume. But volume has streamed into the stock as the break out became obvious and in an uncertain market price is holding up.

I wouldn’t buy this here, but would look for potential entry at a point closer to the $32.60 level, perhaps on early weakness tomorrow. In a market that renews its uptrend, this stock is a prime candidate to achieve fresh 52 week highs.

S T E C Inc (STEC)

This manufacturer of solid state drives is in perhaps the market’s most voracious uptrend. Is there a spot where you can climb on board for significant further gains in lieu of a price correction? In a continuing market uptrend, yes.

A weekly chart shows that STEC has formed a pattern O’Neil refers to as a High Tight Flag. That means price at least doubled over a course of 4 to 8 weeks and then corrected for at least 3 weeks no more than 20%. The buy signal is on a volume move to new highs.

Today might be the day. STEC trades a 50 day average of 2MM shares per day. Little more than halfway through today’s session the stock has traded almost 1.7MM shares, meaning it should well surpass the average.

STEC has today broken through the brief downtrend line formed by connecting the July highs. An hourly chart shows 3 peaks representing these highs. Price has passed the first at $24.88 and needs to pass the others on volume at $25.43 and $26 to confirm the break out. Would consider entry here with a stop under $24.50, allowing for a small correction back to the trend line.

Netflix (NFLX)

This stock was an early gainer at the beginning of the market rally in March and April. It ran into trouble but has built a very constructive bottom the last 2 months.

Notice on a weekly chart how the closing prices from the weeks ending 5/15 through 6/12 saw almost no change. That’s a sign of institutional accumulation. The week of 6/19 price advanced out of the range on excellent volume and after falling back the following week has now closed in a tight trading range for another 3 weeks in a row.

This morning price extended higher on volume on the back of a specious rumor that the company would be purchased by Amazon.com (AMZN). That rumor was essentially laid to rest by an analyst on CNBC. But after an initial spike lower price has held up, a sign that whether or not there is any truth to the rumor there may be validity to this price move.

I would consider long entry here with a stop under the midday low around $41.50. If price surpasses the June price highs on continued volume a move back to the 52 week highs around $50 is a real possibility in continuing market uptrend.