Clear High!

June 22, 2000
Greg Kuhn

Question: How do you know when you’re on
the right track in getting
ever more long — buying the breakouts?

Answer: When you see ’em left and
right and can’t decide which ones to go with, because they all look so sweet.

All carry the right earnings growth
(with the exception of FSLH, which turned its first profit in seven quarters in
its latest quarter, but has exuded five straight quarters of accelerated revenue
growth — 23% to 203%), very high O’Neil RS rankings, with most in the high 90s
and none below 90, the right basing patterns, with volume coming in at all of
the right places, and, of course, huge breakout volume. All of these names,
except for Silicon Storage Tech, which just kind of crept up on me over the past
two days, were mentioned as properly based stocks in my column over the past two
weeks.

Although SDLI was downgraded by a Wall
Street research firm Tuesday, downside volume over the past two days has paled
in comparison to its recent breakout volume — so no concern, to this point.

I’ve seen it before — a Wall Street
firm attempts to knock a high PE stock from its perch (the majority of
exceptional-growth stocks always carry a “too high” PE), only to see
the stock a lot higher months later.

I saw it with Amazon.com
(
AMZN |
Quote |
Chart |
News |
PowerRating),
and remember distinctly a small firm downgrading Yahoo!
(
YHOO |
Quote |
Chart |
News |
PowerRating) on July 10,
1997 — the day after it broke out from a 23-week cup-with-handle base. The
result: The stock was up over 2000% two-and-a-half years later. Not that that’s what SDLI
is going to do. But just let the stock’s own action tell you what’s important.
Not what some analyst thinks.

_{“Remember,
we’re not just buying breakouts here. Big-winning stocks, outside of
biotech or the recent speculative binge in Internet names, need
something big going for them — as in big bottom line.”}

Yes, a highly valued growth will
eventually succumb to selling pressure. That’s why we buy for fundamental
reasons, but sell technically. Trust the sell rules to get you out when it’s
time to get out. Most of the stocks I played during the first quarter had no
business trading at the valuations they were trading at. They all paid the price
eventually. However, my sell rules got me out at the exact right time — with
exceptional profits to boot.

Sometimes, there is a lot of nonsense
in the market — heightened speculative fervor. Recognize it for what it is. It’s
not our job to argue with it. It’s our job to take advantage of it.

With the first set of leaders
performing as well, if not better, than the “Nutcracker” at Radio City
Music Hall (help me Harvey, was it ever featured there?), and new leaders
emerging, others may not be far behind.

Although all led last year’s fireworks
in the market, I write potentially because it remains to be seen
whether a repeat performance is forthcoming. Nonetheless, the characteristics
are there. Some of the names are still in the midst of completing basing
patterns, while others finish them off. Remember, however, a basing pattern is
never complete until the stock breaks out from it.

Speaking of which, following its
low-volume ascent up the right side of its base over the past three weeks,
Siebel Systems appears ready to form its handle setup. It’s only been two days
so far, so more time is likely needed. At this point, though, it’s do or die. If
the handle is formed properly, volume should be explosive for a valid breakout.
To this point, meaningful volume clues have been absent.

Fundamentally, earnings growth has
been solid for Siebel. Year-over-year quarterly growth has expanded a very
healthy amount over the past seven quarters, with the past two quarters matching
70%. Additionally, year-over-year quarterly revenue growth has accelerated over
the past four quarters from 80% to 119%. Moreover, return-on-equity (ROE) and
pre-tax profit margins were a high 24.4% in the company’s latest fiscal year.
These are solid and fairly high numbers.

Checkpoint Software
(
CHKP |
Quote |
Chart |
News |
PowerRating) is
another with very solid earnings growth.

Year-over-year quarterly earnings
growth has accelerated over the past four quarters from 20% to 67%, while
year-over-year quarterly revenue growth has also accelerated over this period
from 37% to 79%. Pre-tax profit margins came in at 50% in the latest fiscal
year, ROE was also a high 41%, and after-tax profit margins have moved up with
the quarterly earnings over the past three quarters to 44.6%. Checkpoint also
carries the highest O’Neil RS ranking possible of 99.

Why is all this fundamental stuff
important?

Remember, we’re not just buying
breakouts here. Big-winning stocks, outside of biotech or the recent speculative
binge in Internet names, need something big going for them — as in a big bottom
line. Why else would a leading fund manager, with billions, like Gary Pilgrim
and his crew at PBHG, buy it? Certainly not because it looks good on the chart.
These people make the charts. It’s their buying that we profit from.

By the way, the PBHG Growth fund held
close to 2 million shares of Checkpoint in the latest quarterly report. Sure, it
means the fund manager has that much more to sell and dump on us, but it also
indicates a high level of confidence at the moment, from someone with a bunch of
money on the line.

Read that as you may. Just remember,
though, your attitude dictates your results.

I can still hear that ninth-grade
teacher I had in Junior High saying in his Southern drawl, “Your attitude will
be reflected on your grade.” I guess he’ll never know how much effect
he really had on me. Funny, I can’t remember a thing about my calculus class in
high school. But his mechanical drawing class taught me how to draw a perfect
trend line. How could I have known?

Mr. Bowe, wherever you are, thank you!

Hey, wait a minute. I’m not done yet.
I got so wrapped up in all of these names, I forgot to mention anything about the
Naz.

It finally broke out of its range and
volume has been humming along the past two sessions. The Naz has closed higher,
and volume, although not screaming, has been above average. So much for that
mild bout of distribution in the Composite I mentioned a week ago.

Like a “spotter” says to his
driver, without the aid of side-view mirrors in a NASCAR stock-car race as he
passes another car down the front straightaway, “Clear High!”

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Clear High!

BUY THE FEAR, SELL THE GREED

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