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Stock Screen: Best Performing Stocks September 1, 2010
An object in motion tends to stay in motion until something stops it. While that’s a fairly rough paraphrase of something you probably heard in science class, it gets to the heart of the concept of momentum. In the realm of stock investing, this concept means that stocks on the way up have a habit of continuing to go up until there’s a decent reason for them to go down. If you can catch the ride, and get off at the right time, there is definitely money to be made.
Large and prolonged share price advances are of interest to investors looking to find investments with positive share price momentum. Of course, a material share price increase brings in the question of valuation. Although some momentum stocks are fairly priced because they are advancing off of low share price levels, many more wind up richly priced relative to their earnings because of their rapid ascent. This valuation paradox is important because, once “something” stops a momentum stock’s advance, its share price can fall sharply. Valuation can be the “something” that ends a nice run.
In this screen, we took the stocks with the best price performance over the trailing 13 weeks and then searched by hand for some, like RPC, Inc. (RES) and Priceline.com (PCLN), whose advances seem on solid ground. However, our simple screen also turned up some companies, such as The Medicines Company (MDCO), that should probably be avoided. This screen, and its opposite (Worst Performing Stocks), is available on a weekly basis in the back of the Index section of The Value Line Investment Survey.
RPC, Inc. provides services and equipment to the oil and gas exploration and production industry in the United States, and, to a lesser degree, in international markets, such as China and Eastern Europe. Its Technical Services offerings include: pressure pumping (38% of 2009 revenues), snubbing (8%), coiled tubing (9%), downhole tools (15%), and nitrogen services (7%). Support Services include rental tools (8%), among others. Approximately 11 insiders own 71.2% of the company’s outstanding shares, (3/10 Proxy).
The company reported record second-quarter results, as the top line rose almost 100% versus the very weak year-earlier period and share net more than doubled sequentially to $0.32. The company benefited from strong unconventional drilling activity in the onshore shale basins. In response to this sustained demand growth, RPC ordered additional pressure pumping capacity. Value Line analyst James Jan Sullivan believes that this capacity growth will help drive profit growth in 2011 and beyond. Moreover, should the growth of onshore shale drilling continue, he expects RPC's profits to advance materially over the coming 3 to 5 years. So, despite the recent 50% plus share price run, this stock may have more room to advance.
Priceline.com is an online travel company that offers airline tickets, hotel rooms, car rentals, vacation packages, and cruises. Customers have the choice of purchasing in the traditional, price disclosed manner, or of using the company’s unique “Name Your Own Price” service, which allows them to make offers for travel services at their own, discounted price. The company collects customers' offers and matches them against a proprietary database of seller inventory.
The company’s shares have surged in recent weeks, as the company reported strong performance for the second quarter, driven by impressive growth in global hotel reservations, where the company likely gained market share. Moreover, Value Line analyst Michael Napoli believes that strong results will persist going forward because the company's brands and service offerings should continue to appeal to thrifty travelers, with growth overseas likely continuing to outstrip gains on the domestic front. Napoli notes that the recent price advance discounts much of the top- and bottom-line gains he expects out to 2013-2015. However, over the near-term, assuming profit numbers remain strong, this stock may have some additional room to run.
The Medicines Company
The Medicines Company is a biopharmaceuticals company focused on the development and commercialization of innovative acute-care drugs for hospital-based procedures. The company's core product is Angiomax, an intravenous anticoagulant used in coronary angioplasty and other interventive procedures. This news driven stock has advanced some 60% in recent weeks.
Value Line analyst Joel Schwed warns that time is running out for The Medicines Company as it tries to extend its patent on Angiomax. Worse, the company returned to profitability in the first quarter because reduced research and development spending helped support the bottom line. For a biopharma company, reducing R&D is not a propitious long-term business decision. At the end of the day, Schwed questions the ability of the company’s stable of drugs or its pipeline to compensate for the eventual loss of the Angiomax patent—no matter how long the company’s legal efforts drag the process out. As such, this highly speculative stock is not suitable for most investors.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.