By Timothy Lutts, Cabot Wealth Advisory
One great way to find high-potential stocks is to look for breakouts to new highs right after a market correction.
So last week I did just that, two days after the Dow Jones industrials ($INDU) scared the pants off many investors by dropping 200 points in a day. I found six stocks worth writing about — stocks that are clearly under accumulation by growth investors.
The most popular of the six among institutional investors — a rough proxy for risk — is Intuitive Surgical (ISRG), the manufacturer of robotic surgery systems that’s become a very dependable source of growth thanks to increasing global penetration and recurring income from disposables used in operations.
In the latest quarter, revenue grew 28% to $499 million, while earnings grew 24% to $3.75 per share. After-tax profit margins are a fat 30.4%. Since the breakout, however, ISRG has been the weakest of the six stocks, falling back below its breakout level to its 25-day moving average.
Only slightly less popular is Chipotle Mexican Grill (CMG), which has grown revenue and earnings every year of the past decade by opening more restaurants.
In the latest quarter, revenues grew 24% to $597 million, while earnings grew 23%. After-tax profit margins were 9.6%, which is great for a restaurant chain. After the breakout, CMG climbed even higher.
Next comes Tractor Supply Company (TSCO), the Home Depot for rural Americans. Like Chipotle, it grows by simply opening more stores. And, again like Chipotle, it has modest after-tax profit margins, in this case 5.7%.
Tractor Supply is the slowest-growing of the six stocks (by revenue). Its $1.24 billion in sales in the latest quarter reflected growth of “just” 20%. But earnings were up an impressive 43% to 96 cents per share! And since the powerful high-volume breakout, TSCO has been holding very tightly in the $98 area, giving little ground.
Moving up the risk scale substantially, we find Liquidity Services (LQDT), a company that runs online auction sites for used and returned merchandise. Not only does it get inventory from seven of the top 10 retailers, more than 30% of its revenue last year came from selling stuff for the U.S. Department of Defense.
In the latest quarter, revenue surged 41% to $106 million and earnings rocketed 85% to 35 cents per share. After-tax profit margins were a robust 11.2%. Since the breakout, the stock has climbed higher and higher to hit a new peak.
Next is a company that went public last October, Ubiquiti Networks (UBNT). The company, located in California, makes high-throughput radio-frequency telecom equipment, which is in great demand in emerging markets because it’s cheaper to install than fiber-optic equipment and cable.
In the latest quarter, revenue mushroomed 95% to $87.8 million, while earnings zoomed 145% to 27 cents per share. After-tax profit margins were a fat 28.4%. Since the breakout, UBNT has climbed even higher.
Finally, there’s a little company