As an investor who follows market trends rather than making predictions, I use some basic fundamental and technical indicators to ascertain whether a stock is buyable. On the sell side, I'll use only technicals, but as I assemble a watch list of buy candidates, earnings are among key criteria.
Estimates for strong future earnings attract institutional buyers. Even though estimates can be wrong on either the high or low side -- as we see on a regular basis when companies report -- the promise of rising profitability is a magnet in and of itself.
I run several fundamental screens that include estimates for the coming quarters or years.
Going into a new year, I was curious to see which leading stocks -- those already showing a track record of price growth and strong profitability -- are expected to continue growing earnings at a fast pace.
I also screened for stocks showing strong price action recently, to see how they are ending 2011 in comparison with the S&P 500's year-to-date loss of 1.3%.
One company with big expectations for 2012 is the gold mining company Randgold Resources (GOLD). Earnings and sales growth have been increasing at ever faster rates in recent quarters. Analysts forecast profit growth of 292% in 2012, to $4.43 per share. The U.K.-based company operated gold mines in Mali, the Ivory Coast and other locations.
The company's earnings have increased in the past three years, and it has been raising its dividends.
The stock has risen 27% year-to-date, and as December winds down, it is hovering above its 40-week line and below its 10-week. Trade has been choppy lately, after the stock pulled back from its all-time high of $120.73 in November.
Analysts also have high hopes for Accretive Health (AH), a Chicago company that offers a range of administrative services for health care providers. Wall Street is eyeing 2012 earnings growth of 63%, to $0.70 per share.
The stock has not fared particularly well on a technical basis in the second half of 2011, falling 29% from its August high of $32.82. Accretive is not ending the year as a buy candidate, based on its technicals. However, its earnings and revenue both grew at stellar rates, and if that trend continues, I'll track this stock as a possible 2012 gainer.
A stock that's ending the year as a fundamental and technical winner is Questcor Pharmaceutical (QCOR), maker of treatments for inflammatory disorders and other ailments. The stock is up a whopping 194% year to date for 2011, and has trended higher even amid high market volatility.
Analysts expect a profit gain of 61% in 2102 for QCOR, to $1.92 per share.
If there's any technical knock on Questcor, it's that the stock really hasn't taken a proper breather since emerging from the bear market nearly three years ago. It's formed some small consolidations since then, but none that undercut prior lows, potentially flushing out investors lacking in conviction. At this juncture, it would not be surprising to see the stock form a new base before running higher again.
Another stock that's ending 2011 on a high note is Rackspace Holdings (RAX), which provides Web hosting and other services for business customers.
Wall Street expects earnings per share (EPS) of $0.80 in 2012, a 51% increase above 2011's estimated profit of $0.53 EPS.
The stock has moved 40% higher in 2011, and has been trading in a fairly tight price range above its 10-week moving average lately -- potentially bullish action. Its most recent price consolidation was the type that bottomed out a lower price than the prior basing action. Sure enough, it rose nearly 50% after rallying from its Oct. 4 low to an intraday high of $45.46 on Nov. 8.
Like many other stocks, Rackspace has floundered a bit since then, but is holding above key moving averages. So far, it's consolidating in an orderly fashion as the market has shown sharp up-and-down whipsaw action. It rallied to $45.45 -- a penny shy of its Nov. 8 session high -- on Tuesday. I'll continue watching for the stock to top resistance above $45.46 in future sessions.
If the market conditions remain weak or volatile, these stocks could suffer technically in the early months of 2012. As stated above, I don't make predictions about how a stock will perform, but rely on price trends instead. However, institutional buyers are drawn by strong profit growth, so if these companies fulfill expectations, new buying sprees could send prices higher again.