Bubbles may be good for chewing gum and making dogs go crazy in the backyard. But asset bubbles are something entirely different. With the FOMC rate decision and statement due out today there has been talk about an asset bubble building here in the states. Much of the talk is mostly an academic debate right now but there is a real threat that the punchbowl stays out too long and equity markets turn into asset bubbles. Bubbles are great, until they pop. Then it’s back to the bottom end of the boom-bust cycle.
That risk associated with an entire market being a bit too “bubblicious” should make investors nervous. However, on the flip-side, you should be excited when one of your individual stock holdings appears to be “bubblicious.” The good news about having an individual stock that has run away recently is that there is no universal law of equities that is ultimately condemning the run. Often times, the underlying fundamentals surrounding a stock have changed enough that they now warrant a much higher multiple and stock price.
Finding Supporting Fundamentals
One way to find these stories is to look for stocks that are at fresh 52-week highs but also are Zacks Rank #1 (Strong Buy) stocks. Think about what it means to be a Zacks Rank #1 (Strong Buy). The four factors of Agreement, Magnitude, Upside and Surprise are all centered around recent earnings estimate revisions from analysts. The analysts are seeing something in the underlying fundamentals that compels them to push their estimates higher, thereby potentially changing the fundamental story on a stock. Perhaps enough to justify a much higher stock price.
Here I’ve uncovered three stock ideas for you which are all Zacks Rank #1 (Strong Buy) stocks that are breaking out to fresh 52-week highs and are also Zacks Momentum Style Score “A” stocks. This positive momentum in the stock price as well as the earnings story could be uncovering runaway stocks that may rally throughout the rest of 2015.
Centene Corporation (NYSE:CNC)
Centene Corporation provides managed care programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income, and the State Children's Health Insurance Program.
Shares of CNC have done very well since the market bottomed out in October 2014. Prices have increased from below $40 to nearly $80. Much of the run has been spent above the 21 day moving average, save for a sharp retracement in late April. After that drop the commodity channel index (CCI) was extremely oversold down at -200. A rebound in the stock began and a buy signal from the CCI saw the stock rise from $62 to the levels it enjoys today. Volumes have increased over the last few months as well, indicating some institutional interest in this name. All very bullish signs.
NeoPhotonics Corporation (NYSE:NPTN)
NeoPhotonics Corporation is engaged in the design and manufacture of photonic integrated circuit, or PIC, based modules and subsystems for bandwidth-intensive, high-speed communications networks. Products offered by the Company includes high-speed products that enable data transmission at 10Gbps, 40Gbps and 100Gbps, agility products such as ROADMs that dynamically allocate bandwidth to adjust for volatile traffic patterns, and access products that provide high-bandwidth connections to more devices and people over fixed and wireless networks.
While NeoPhotonics has enjoyed a breathtaking run as of late, the story here does differ from CNC. NPTN was a virtually unknown stock until late February when volumes began to increase dramatically and shares rose from below $3 to over $6 in just a few short weeks. A small spat of volatility took the stock back to the mid-$5s by early May. From there, shares have been on fire running all the way to $11 recently. Look at the dramatic increase in volume in early March and then the exponential increase that occurred in late May and early June. I think it’s safe to say this is a stock that should be on your radar.
Dave & Buster`s Entertainment (NASDAQ:PLAY)
Dave & Buster's Entertainment Inc. is an owner and operator of venues in North America that combine dining and entertainment. The Company offers its customers the opportunity to Eat Drink Play and Watch in one location. Eat and Drink is offered through a full menu of Fun American New Gourmet entrees and appetizers and a selection of non-alcoholic and alcoholic beverages. The Company's Play and Watch offerings provide an assortment of entertainment attractions centered on playing games and watching live sports and other televised events.
Dave & Busters is a much more well-known stock than NeoPhotonics but the run it’s been on lately has been nearly as impressive. After a great run from November 2014 to March of this year shares began to ease into a consolidation range through most of May. A jump up in volume pushed the stock through the top end of the range and saw shares breakout to fresh 52-week highs. With little topside resistance here shares continue to drift higher on healthy volume.
Bottom Line
Don’t be afraid of these runaway breakout stocks. When it comes to individual stock ideas what may look like a bubble at first could be a change in the underlying fundamentals that supports to the new higher prices. These three stocks are great examples of this.