The market has been acting better during the past few weeks. It's been shrugging off bad news. It's been reacting positively to good news. And all this positive action was happening even before last week--before the U.S. Federal Reserve's big move. Let me be blunt: I believe the Fed's change in stance, especially its move to buying long-term U.S. Treasuries and Agency bonds, could be the catalyst that propels the market higher.
In a way, it's almost as if the Fed has stopped targeting the overnight interest rate and is looking to target the mortgage rate. And I believe that makes some sense; the housing decline is truly at the root of this problem, and while artificially propping up home prices isn't my favorite tactic, logic tells me that mortgage rates below 5% (maybe even 4.5% or 4%) are going to help stabilize prices. And that will at least put a hold on some of our credit problems.
Is this up-move the start of a huge bull market? Will the rally fail after the calendar turns? Will the Boston Celtics win 70 games this year? No one knows the answer to these questions (although the Celtics just look amazing). Right now, I'm taking it day by day, but I do believe the path of least resistance is now up, so if you've been in your storm cellar, it's time to begin probing with a few strong stocks.
On a similar-but-related topic is the obvious question, "What should I buy?" I'll give you a pick below, but I first want to briefly touch on the topic of beaten-down stocks, and why I don't play them.
Most investors are now asking about names like U.S. Steel (X), Fluor (FLR) and Potash (POT) -- all the leaders of the last bull market that have popped up the past couple of weeks. And the moves have been spectacular, percentage-wise.
Yet these are not what I would call high-odds plays, and they remain super-volatile. Thus, it's hard to: a) take a good-sized position in them (too much risk), b) set tight stop losses (because you could get stopped out in hours) and c) play them out for bigger gains (because they face a ton of overhead resistance). Said another way, it's hard to buy these with prudent risk limits and still make any sort of money.
Here's another way to say it: I believe that if you delve into the laggard pile 100 times, you're not likely to make a ton of money. Sure, you're going to hit a few quick 50% gainers, but you probably won't have enough invested to really make good money. And you'll also likely get caught in a few losers too, which will bring your winnings down.
Sure, I get excited when I see such big percentage moves, but I also know that the real leaders of an advance are near new highs, not coming up off their lows. And I also know that these off-the-bottom names generally hit resistance a few weeks after coming off their lows. I'm interested in the stock that institutions are going to buy for many weeks, not just for a few days.
So what's a potential leader? I could write about some of the (very few) stocks that are hitting new peaks--only 14 stocks hit new peaks on the NYSE and Nasdaq last Thursday, for instance--but instead, I'm highlighting a company with huge growth, a big story, and whose stock is in the sixth week of building a good-looking base.
It's Myriad Genetics (NASDAQ: MYGN, Stock Forum), which has been mentioned in past Cabot Wealth Advisories. To review, the company is the leader in the new field of cancer predisposition testing. It has five tests on the market that tell patients whether their genes make it more likely that they'll get various types of cancer. During the past few quarters, revenues from these tests have risen at a 50% annual clip, and there's no sign of that slowing down.
The company also has a pharmaceutical division, but it's going to spin that off sometime in 2009. That should be a big positive, as the drug development division carries good potential, but also big-time costs. Once the cancer predisposition testing division is on its own, profits are sure to soar.
Not that they've been doing badly. Revenues rose 53% to $73.7 million in the third quarter, while earnings soared to 30 cents a share, up from a loss of 18 cents the year-ago quarter. Better yet, analysts expect the bottom line to jump 40% in each of the next two fiscal years. The stock itself actually hit new peaks in early November, despite the market's weakness, and is now building a new launching pad.
In fact, the past few weeks have successfully taken the stock out of the public's eye, and while it may need a bit more time to set up, I think it's primed for a breakout early next year. If the market's nascent uptrend can persist, I think MYGN can be a big winner.