Investing For the New Millennium

What You Say Matters a Lot in Taking Investing Seriously!
by Kenneth J. Gruneisen, Registered Investment Advisor, Source Capital Group, Inc. Members NASD/SIPC
I am shocked at what I hear people say when discussing their experience with investing in the stock market. It often goes something like, "I have some money I’d like to play around with in the market", or "I’ve been fooling around with stocks for a few years", as if investing is some sort of recreational activity. To many of us, sports are a recreational activity, but if you spoke with Barry Bonds do you really think you would hear him say he, "messes around with hitting baseballs"? Or might Tiger Woods say he "fools around" on the golf course? No! To the pros it is always serious business!

"Buy what you know" is a famous Peter Lynch maxim. Notice he didn’t say to buy what you think. So, when I hear someone say they think that a particular genetics company could have a bright future, or that an oil exploration company has a chance at tapping into a really large find, I just take a look at the hard evidence. Analyze the company’s fundamentals (check its earnings track record) and do some technical analysis (study the chart) and you know for sure what is real and what is just wishful thinking. Successful investing is not about guesswork, but interpreting what is actually happening.

One rule of thumb is to watch for leading industry groups, since the majority of leading stocks are also in the leading industries. Being positioned in the right industry group is nearly as important as investing in the right company. Each new bull market cycle is always led by certain industries. Once you zero in on a stock, check to make sure that another stock in the same industry group is also showing leadership as a way of confirming your selection.

Leading stocks are leaders for a reason, and different industries show market leadership as economic conditions and consumer trends change. If you watch the group rankings and pay attention to the top five sectors with stocks making the most new price highs, this will certainly help you to identify the new leaders.

"Leading stocks are leaders for a reason, and different industries show market leadership as economic conditions and consumer trends change."

Historical analysis shows that stocks within the top half of all industry groups greatly outperform those in the bottom, so be sure to avoid the bottom 20% of groups. However, if you notice an industry group moving up from the bottom of the list to the top of the list in the past three months, you should definitely be studying the leaders in that area. Look for quality companies capable of producing healthy earnings and sales growth, which will almost always be a direct result of demand for exceptional new products or services.

Have you ever concluded that a stock’s best days were behind it, only to watch it soar as you looked on from the sidelines? Assumptions can often come back to haunt investors, and stocks that are doing best actually tend to keep doing well. Meanwhile, those that are slumping are likely to continue doing poorly. Contrary to the popular bargain-hunting mentality, the best performing stocks are usually great companies, and through superior performance in terms of earnings, sales, profit margins and the price of their stock they are inclined to continue manifesting their strength.

I hope that you will resolve yourself to following these guidelines as closely as possible. Promise yourself that you will forget about the mistakes of the past and press on to the greater achievements of the future. Tell yourself that in the months ahead you will put your emotions aside and be patient and disciplined in your approach to investing. Don’t try to do it, just DO IT!

I’d venture to say that at least 50% of the time when a person says they will try to get around to doing something they ultimately don’t do it. When making plans such as inviting someone to an event it always triggers something inside of me when I hear, "I’ll try to make it". Friends and coworkers have occasionally heard me quote a poetic phrase that is a favorite of mine whenever I want to help them to put it more clearly. It goes like this, "Trying is lying, to do is to be true."

Ideas Worth a Closer Look
- Timely Stock Ideas Based Largely on CANSLIM - 

Be sure to have a defensive sell strategy and be disciplined if you decide to buy any stocks at this time. The Dow, Nasdaq and the S&P 500 are all below their 200-day moving averages. Before you get very aggressive about making new purchases, the major indices need to provide a convincing signal that we are in a sustainable rally.

Nutraceutical International Corporation (NASDAQ: NUTR $8.50)
Nutraceutical is one of the nation’s largest manufacturers and marketers of quality branded nutritional supplements sold to health food stores, with a strategy to enhance its position as a leader in supplying quality branded products while continuing to generate rapid growth in sales and profitability. Its branded products are sold under the Solaray, KAL, NaturalMax, Veglife, Premier One, Sunny Green, Natural Sport, Action Labs, ActiPet, Thompson, and Ultimate Nutrition brand names. Under the name Woodland Publishing, it also publishes, prints and markets a line of books and booklets to book distributors, national retail bookstores and health and natural food stores. Internationally the company also manufactures bulk materials for use in its own products and for sale to other manufacturers and marketers in the nutritional supplement industry under the tradenames Monarch Nutritional Laboratories and Great Basin Botanicals.

Technically the stock has recently spiked to new highs on heavier than average volume out of a 14-week base. IBD has ranked it in the top 10% of all stocks based on its earnings growth and relative price strength. In the Cosmetics/Personal Care Group there have been other companies showing leadership. This is a low priced issue with average daily trading volume near 30,000 shares, so volatility can be expected. It seems that significant upside potential is there as it gains greater institutional interest.

Hanger Orthopedic Group Inc. (NYSE: HGR $17.30)
Hanger designs, fabricates, fits and maintains a wide range of standard and custom-made braces and other devices (such as spinal, knee and sports-medicine braces) that provide external support to patients suffering from musculoskeletal disorders, such as ailments of the back, extremities or joints and injuries from sports or other activities. This includes custom-made artificial limbs for patients that are without limbs as a result of traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders. It also distributes branded and private label devices and components in the United States that are manufactured by third parties.

Revenues are generated from three operating segments: Patient Care, Distribution, and Manufacturing. It owns and operates more than 600 orthotic and prosthetic (O&P) patient-care centers, with over 1,000 clinicians in 42 states. Increases in same center sales and improving gross margins have helped attract greater focus on the company from mutual fund managers. Near the market’s July lows it tested and found support at its 200-day moving average, and it has been rising rapidly and spiking to new highs on above average volume. In the Medical-Products group of stocks this is one of the high ranked leaders setting the pace.

How Are They Now?
Follow up on the Stock Ideas that were Previously Profiled in "Ideas Worth a Closer Look"
Something can be learned from studying past experiences both good and bad. Below you will find follow-up commentary on ideas featured in the two previous issues of this newsletter. These remarks help to explain critical technical trading points or news events that occurred which had an obvious impact on the price action of these issues.

Neoware Systems, Inc. (NWRE)
Featured 07/01/02 at: $11.34 | 08/30/02 Close: $17.82 | Up/Down: +57.1%
After its late-June breakout we featured NWRE. Following the breakout there was some initial downside testing, but trading volumes July 5th and 8th were exceptionally low, indicating there were not a lot of willing sellers. On the 9th it spiked higher on volume that exceeded 1 million shares for the first time since March 8th. To enjoy this stock’s big gains you’d have had to endure a gut wrenching test of the 50-day moving average occurring on July 23rd and 24th, that again coincided with the broader market action, but was the point where it ultimately was able to reverse and power its way much higher. Better than expected earnings were announced on the 28th, yet the stock’s price action was obviously already forecasting the good news to come.

Weight Watcher’s International, Inc. (WTW)
Featured 08/01/02 at: $43.15 | 08/30/02 Close: $47.45 | Up/Down: +9.9%
While at the time it was featured Weight Watcher’s had not yet cleared previous highs, WTW was showing powerful signs including a July 24th reversal (which coincides perfectly with the action in the major indices) and also a gap up on July 29th. On August 12th it finally did break to new highs on heavier volume. Since that time it has been trending higher, but has seen a couple of high volume distribution days including August 13th and 21st. Of 197 Industry Groups rated by IBD, the Cosmetics/Personal Care group is ranked 11th, after being ranked 72nd just 3 months ago.

eResearch Technology, Inc. (ERES)
Featured 08/01/02 at: $15.15 | 08/30/02 Close: $16.35 | Up/Down: +7.9%
After spiking up rapidly it appeared likely to show some normal consolidation before resuming its rise, but immediately after it was featured ERES endured heavier selling than had been expected. However, make note of the way it clearly found support right at levels where in July it had managed to dig in its heels. On August 19th it spiked back above its 50-day moving average line, and then followed that up on the 22nd with a brief spike to new all-time highs on heavier trading. The Computer Software-Medical group features at least two other companies showing leadership including Quality Systems Inc. (QSII), and Computer Programs & Systems (CPSI).

Leaders List Screening Results
The CANSLIM.net Leaders List Screening Tool allows investors to screen CANSLIM.net’s database of high-ranked stocks. Continuously updated data throughout each trading day makes it possible for you to find high volume breakouts before folks are reading about them in the next morning’s paper. The results shown here are from a screening done at 11AM on Tuesday, September 3rd, 2002. The criteria used for this screening is listed below. You can set your own criteria based on parameters such as % from 52 week high, volume, industry group, exchange, etc. here http://premium.canslim.net/leaders/ss1.asp