Hot gadget maker Apple and filtration company Polycore are favourite stocks of market strategist and technical analyst Gene Peroni Jr., who favors growth over value even as the economy is stuck in a rut.
Peroni, whose father pioneered the "Peroni Method" of selecting stocks using a technical perspective over 50 years ago, says he follows charts and valuation, as well as money flows and relative strength, to find stocks where there is sustainability of a trend.
"In times like these, we are ambushed daily by these headline news events. Technical analysis lets us get a clearer interpretation of the real market condition," says Peroni, who works for Conshohocken, Pa.-based Advisors Asset Management, a firm with $7.3-billion (U.S.) in client assets. "When the trends diverge from the daily headline news, it can be very exciting."
Peroni says the divergences he is witnessing now are bullish for stocks, and that the underlying tone of the equity market is improving relative to the volatility, which has been spurred by the growing debt crisis both domestically and in Europe and a weakening global economy. It seems not a day passes without some drama involving the potential of a Greek default or rescue, and that increased uncertainty has led to wild swings in equity prices.
"The market never likes uncertainty and it's faced with plenty of uncertainty now," Peroni says. "Through it all, the market's internal behavior is improving even in the thick of the very unstable events globally. I think we're closing in on some sort of a bottom here. So much of the bad news is on the table and, to some degree, digested by the market."
While large-cap, dividend-paying stocks have been the defensive go-to for investors hungry for yield and looking for protection, Peroni says there has been a migration from the perceived safety plays from large-caps to quality mid-cap stocks, many of which offer more earnings growth leverage.
"The biggest trend we're seeing is that growth is winning out substantially over value," he says. "That is very encouraging. This market is much more balanced in terms of its leadership. It's uniquely broad-based. This market continues to be populated by different and diverse sectors."
As proof, Peroni points out that a defensive consumer-staple stock like Colgate-Palmolive is making new record highs at the same time a rocket stock like fertilizer company CF Industries is also reaching all-time highs.
"It's a very exciting environment, and it's one where many investors remain largely absent," Peroni says. "Investors might be doing themselves a disservice by not regarding growth as part of their overall equity allocation."
Peroni offers up several growth stocks he has come across using the methodology his father pioneered more than half a century ago. Peroni says these stocks are in portfolios of his clients and have both short-term appeal based on technical factors but also have good long-term potential.
"These are stocks that we feel strongly about not for a trade but to hold for the long haul," he says. The following pages detail five stocks Peroni is currently favoring in this market environment.
Company Profile: Polypore is a global technology filtration company that develops specialized polymer-based microporous membranes used in separation and filtration processes.
Peroni's Take: Polycore has a solid trend of increasing revenue and earnings over the last several quarters, although a forward price-to-earnings ratio of nearly 23 makes the stock look expensive. However, Peroni is a big fan of Polypore's technical chart.
"Polypore has a very good long-term trend history, going back even over the last year," he says. "The stock has performed very well relative to the market."
The stock swooned in August along with the broader market, yet shares rebounded and are up more than 60 per cent in 2011. Peroni says that after the August plunge, the stock is base building very nicely.
"The breakaway potential in this stock is very good," Peroni says. "It's one stock of a number of stocks in the sector that look attractive. When we put a stock in a portfolio, it has to represent other similarly attractive stocks in that same sector."
Company Profile: Carbo Ceramics is the largest supplier of ceramic proppant for fracturing oil and gas wells. The company is also a provider of the world's most popular fracture simulation software.
Peroni's Take: Carbo Ceramics, like Polypore, has increased earnings and revenue over the last year. And also like Polypore, Carbo shares have a forward P/E above 20.
"It's a higher-priced stock, so it is a bit volatile. But we do like this industry," Peroni says. "We hold Carbo in several different portfolios."
From a technical perspective, Peroni says Carbo has a similar pattern to Polypore in that it was making a string of new 52-week highs. "In August it declined quite sharply but has now recovered," Peroni says.
Shares of Carbo are up 47 per cent this year and yet are still below the all-time high of $183.34 set in July. "It is trading at its 50-day moving average level, which is another good sign like Polypore," Peroni adds.
Company Profile: Amazon is the largest online retailer of consumer products ranging from books and movies to toys and electronics.
Peroni's Take: While Amazon has been able to grow revenue, increased costs and expenses have put a dent in profitability. For example, revenue rose to $9.9-billion in the second quarter from $6.6-billion a year ago, yet earnings per share fell to 41 cents from 45 cents.
Peroni, however, sees opportunity when comparing Amazon's performance to that of its brick-and-mortar competitors.
"If you overlay a chart of Amazon with a company like Best Buy(BBY_), you see a real divergence there," Peroni says. "It is doing very well relative to its brick-and-mortar competitors. The stock has been making new 52-week highs before August and now it is showing very good relative behavior."
Despite fears that the consumer has rolled over, shares of Amazon are up nearly 30 per cent this year and the stock is near its all-time high of $244.
Company Profile: Herbalife is a network marketing company that sells nutrition and weight-management personal care products.
Peroni's Take: Even in a bad economy, consumers want their nutritional supplements.
Herbalife shares have soared 70 per cent this year to record highs, and Peroni says the stock has a very strong longer-term trend.
"It's a reasonable price-to-earnings ratio," Peroni says. Herbalife has a forward P/E of 16, a slight premium to the broader market. That valuation may be justified considering earnings and revenue were up sharply in the second quarter both sequentially and year over year.
"The P/E ratio may look a little high, but there is good growth potential," Peroni says. "There a number of stocks in this particular consumer sector – personal care – that are very attractive."
Company Profile: Apple, the largest company in the world by market cap, is the maker of personal electronic devices like the iPhone, iPod and iPad. The company also designs and manufactures desktop and laptop computers and software.
Peroni's Take: Haters point out that Apple is above its 21- and 50-day moving averages and that the momentum may be losing steam as Apple has hit a new record high. Still, Peroni is a fan of both Apple's chart and its growth story.
"This stock is terrific. It has a very good longer-term chart. It has an exciting story," he says. "It still seems to be in a growth momentum stage here."
Peroni is impressed that shares have withstood Steve Jobs' stepping down from day-to-day management. He's even more pleased with Apple's valuation.
"The forward multiple here is 13, which is about the market multiple without backing out cash," Peroni says. "You're getting a real growth stock and, unlike the roaring 1990s, this is a very reasonable valued company at this stage."