Riding momentum isn't a sinDecember 18, 2013: 7:59 AM ET
This article was published in the December issue of Money magazine.
By Paul R. La Monica
Buy low and sell high may be the first rule of investing, but that doesn't mean you should invest only in poorly performing shares while ignoring stocks on a roll.
If this year's market has taught you anything, it's that stocks that go up can keep climbing higher. In fact, history shows investing in the prior year's top-returning groups beats betting on a rebound among last year's worst performers, notes Sam Stovall, chief equity strategist at S&P Capital IQ.
No one is saying to go buy Tesla (TSLA) -- up 350% year to date; price/earnings ratio: 98 -- or Netflix (NFLX) -- up 300%; P/E: 93 -- says Eric Jackson, managing member of the hedge fund Ironfire Capital. Instead, look at shares of companies that are within 10% of their 52-week highs. Then focus on names with strong profit growth, low debt, and reasonable valuations.
I ran this screen and was happy to see that several companies I cited in columns earlier this year made the cut, including FedEx (FDX), GameStop (GME), Qualcomm (QCOM), and Union Pacific (UNP). Here are three new names that have also had stellar runs -- and that still look as though they've got fuel left in the tank:
Seek financial strength...
Corning (GLW) is an old-guard manufacturer thriving in the new tech world because of its Gorilla Glass unit, which sells screens to most major smartphone and tablet makers. Plus, "the company's balance sheet is a fortress," says Irwin Michael, portfolio manager with ABC Funds, which owns the stock. Those strong finances allowed management to recently announce plans to buy out Samsung Display's stake in a key joint venture that makes LCD displays. That acquisition is expected to boost Corning's profits by 20% in 2014 and 2015.
...and sustainable growth
The online travel site Priceline.com (PCLN) has been on a tear amid strong revenue and booking growth. Yet Mitch Rubin, manager of the RiverPark Large Growth Fund, which owns the stock, says investors shouldn't be scared off by the stock's P/E of 21.
The company's annual profit growth rate is as high as its P/E, a sign the stock isn't necessarily overvalued. Plus Morningstar analyst Dan Su says Priceline's outlook remains strong as the firm makes a big push into Europe and Asia, where online booking is less prevalent than in the U.S.
Rubin also likes the private equity firm Blackstone (BX), a leader in two asset classes gaining momentum: commercial real estate and alternative assets such as hedge funds. The firm's third-quarter earnings surged more than 30%, thanks to its real estate portfolio. Blackstone's size -- it is the world's third-biggest player in private equity -- should help the firm keep attracting assets.
"Their asset growth has been strong since their IPO, and it will continue to grow," says Rubin. Yet the stock trades at a P/E of 9, nearly half that of other asset managers.