To many investors, it seems counterintuitive to track stocks trading near new highs. After all, the reasoning goes, the run-up is over, so why not look for stocks that offer more of a bargain?
Of course, it's desirable to buy a stock before it rallies, not after. But when a stock is at new peaks, it is showing the kind of institutional support that frequently leads to further price gains. For that reason, it's worth tracking stocks perched at lofty heights. While they are not buyable right away, a dip, or even the next consolidation, could offer an attractive entry point.
Plenty of fund managers will hold a stock through a correction. Their analysis is often more fundamentally than technically driven, and their models show that strong fundamental performers will rebound after retreating into a base.
Gun maker Sturm Ruger (RGR) is a small-cap stock that I have tracked for the past several months. It has broken out of a series of constructive price consolidations, starting in February 2009, just before the broader market went into a new uptrend.
Sturm Ruger shot up to an all-time high of $46.66 on Feb. 22, and pulled back in subsequent sessions. It is holding above key moving averages. A consolidation after new highs is naturally to be expected. This can often result in a new buying opportunity, as the stock rallies and once again approaches the previous high.
One caveat about Sturm Ruger: Though it's become increasingly popular with small-cap managers, the lengthy run-up could signal that it's time for a significant correction. In addition, weakness in small-cap indices, such as the Russell 2000 and S&P 600, is also a possible warning sign about even top performers like Sturm Ruger. In other words, while I continue to have conviction about this stock, it may be necessary to sit through a steep or lengthy correction before a new buy point materializes.
Another smaller stock retreating from a recent high is Liquidity Services (LQDT), a surplus goods auctioneer. However, as with Sturm Ruger, this stock has notched a long uptrend, which also began with the emerging market uptrend three years ago. Historically, repeated consolidations without a steep enough pullback to undercut the most recent trough can be an indication that a run-up is getting tired.
Wall Street has some good earnings estimates for Liquidity Services over the next couple of years. But I like the prospects for the stock, even considering that it may be due for a breather in the not-so-distant future. If that happens, I will still continue to monitor it for the next heavy-volume rally to a buy point near its prior high price.
Having gone public in 2006, Liquidity Services has youth in its favor. Companies within their first decade or so of public trading can be market price leaders.
Another young stock showing good recent price action is Luxembourg-based Altisource (ASPS), which provides debt collection, technology, and other services to financial- and real estate-industry customers.
The stock jumped past a technical buy point of $54.36 on Feb. 26 in 3x normal volume. It made significant price gains in the weeks ended Feb. 17 and Feb. 24.
Altisource went public in September 2009. The stock has been in rally mode since December 2010, pausing for a few brief consolidations. After climbing to an all-time high of $65.71 on Feb. 24, the shares have been pulling back in recent sessions, in keeping with declines on the small-cap indices.
At this juncture, there is a potential purchase point above $65.71, However, if the stock takes its time to consolidate, a pattern with a lower entry point may take shape.