This Is Where It Gets Tough

 | Feb 27, 2012 | 11:30 AM EST  | Comments
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We're at a tricky point in the market right now. Major averages are still in uptrends, and we're seeing little in the way of sell signals. In an environment like this, it makes sense to put money to work. Question is, are there high-quality growth names still within buying range? By high-quality, I mean stocks with superior fundamentals showing relative price strength. This is where it gets difficult.

A common pitfall for investors is to chase the high-flyers that have moved a lot already -- names such as Apple (AAPL), Intuitive Surgical (ISRG) and Continental Resources (CLR), for example. Of course, buying too late is an easy way to lose money. The last time to buy Apple was when it broke out above $426.70 last month. Intuitive Surgical's last buying area was $449.16, on its Dec. 23, breakout, and Continental's was $72.98, its Dec. 5 intraday high. That's where the stock was when it cleared a base in early January.

Isolated buying opportunities still exist, but they're getting harder and harder to find. One is NetSuite (N). It broke out above $48.81 Friday, riding Salesforce.com's (CRM) coattails higher after the latter reported strong earnings. Both firms are providers of software for on-demand customer-relationship management. Big growth is expected for NetSuite, with full-year 2012 profit expected to soar 40% from 2011 to $0.21 a share. Even better, growth is expected to accelerate in 2012, with a 62% climb to $0.34 a share.

NetSuite (N) -- Weekly
Source: StockCharts.com

A couple of other growth names with solid fundamentals and decent charts look interesting, but I have my concerns.

Fortinet (FTNT) continues to work its way higher after its earnings-inspired gap up in early February.  Earlier this month, the network-security firm reported another strong quarter, with profit up 27% from a year earlier to $0.14 a share and sales up 29% to $120.9 million. That's solid sales growth indeed, but it's still a slowdown from 34% growth in the third quarter. I can live with a slight slowdown in sales growth. Recent low-volume gains are more of a concern.

Headed into Monday, Fortinet was trading slightly above a recent high of $26.60. The stock definitely isn't technically extended yet, but I'm concerned that volume is getting progressively lighter as the shares keep moving higher. What would be best to see from here would be a low-volume shakeout. Price action such as this could ultimately pave the way for Fortinet to see a bona fide heavy-volume upside breakout above its all-time high of $28.56.

Fortinet (FTNT) -- Weekly
Source: StockCharts.com

Under Armour (UA), meanwhile, has also moved into position for a breakout try above $86.87. This company has shown solid earnings and sales growth in recent quarters. Most recently, last month the athletic-apparel maker reported a strong quarter as profit increased 41% year over year to $0.62 a share. Sales rose 34% to $403.1 million.

A breakout could still work in Under Armour, especially after the stock's nice move on Friday. But the main worry on my mind is that, with growth names screaming higher for weeks now, this stock hasn't truly moved yet. This is a legitimate concern. Buying laggard breakouts is more risky than buying early-stage breakouts.

Under Armour (UA) -- Weekly
Source: StockCharts.com

The moral of the story is to be careful out there with new buys. It's tougher to make money now than it was in early January, when the rally was gaining traction. Leaders started coming out several weeks ago. It's possible that some could still emerge, but it will be a very small number. Try not to force the issue if you're under-invested.

Sure, it's tempting to chase big market leaders such as Equinix (EQIX), SolarWinds (SWI) and Fastenal (FAST). However, it's a good bet that names like these, and others, will come back at some point and offer viable entry points at lower prices.

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