Coiled Spring Stocks

By Chloe Lutts


Today's Market

Building a Watch List

Coiled Spring Stocks


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It's always interesting to be in my shoes during market downturns. As editor of the Dick Davis Digests, I spend the majority of my day reading what our hundreds of contributors are writing. As corrections begin to develop, they exhibit a variety of responses. The perma-bears say, "I told you so." Advisors who were already wary, and largely in cash, may immediately sell everything and stick their heads in the sand to wait out the pain. But most of the experts will own at least a handful of stocks at the beginning of any correction, and most of them take a sort of wait-and-see attitude.

And then, one by one, they begin to bail.

It's now week six of the current downtrend, and a good number of our contributors have said "sayonara" to the market for now.

Almost all are least recommending that subscribers hold off on new buying, with the exception of value-focused letters and some speculative deep-discount buyers.

It's not a very fun environment in which to be trying to pick cream-of-the-crop stock recommendations for a digest.

But it is instructive.

You see, even when they're not recommending new buying, a lot of our contributors still have to profile new stocks in each issue. In general, they try to pick stocks that will begin outperforming once the market turns around, when they will want to put money to work. So how do you find these stocks?

The most tried-and-true approach is to look for "coiled spring" stocks. These are stocks with pent-up buying power that will be unleashed once the weight of the lousy market is removed--like a coiled spring. You can recognize these stocks by what they don't do--and that's go down. In a lousy market, especially one that's been dragging on for six weeks, investors start selling everything--even good stocks. And most fall in price as a result. The only stocks that don't fall are those with enough buying power to counter the selling power. So once the selling power is lifted--boing!

You can recognize these coiled spring stocks by their charts. They're staying fairly level, or at the very least declining a lot less than the market. We've featured a lot in the Digest recently, so I can share a few with you today.  

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Today's first coiled spring is courtesy of the Dick Davis Dividend Digest, where the stocks are generally a little more conservative but all pay nice dividends. This company, which only yields 1.9%, is about as growth-oriented as the Dividend Digest picks get. On a total return basis, it's a winner, gaining 144% in the past two years. The stock is Eastman Chemical (EMN). Here's the gist of the recommendation from Ford Equity Research Report Editor Richard Segarra:

"Eastman Chemical is a chemical company which manufactures and sells a portfolio of chemicals, plastics, and fibers. ... While Eastman's earnings have increased from $6.24 to an estimated $8.76 over the past five quarters, they have shown acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates an improvement in future earnings growth may occur. ... Eastman's operating earnings yield of 8.4% ranks above 85% of the other companies in the Ford universe of stocks, indicating that it is undervalued. ... Eastman's stock price is up 69.3% in the last 12 months, up 14.4% in the past quarter and up 2.1% in the past month. This historical performance should lead to above-average price performance in the next one to three months."

Since the beginning of May, EMN is down only 8%, making it one of the strongest stocks in the market. I'd recommend this stock for all investors if it continues to hold up.

Today's second coiled spring is in a very different industry, retail. Ross Stores (ROST) was recommended in the latest Dick Davis Investment Digest by Louis Navellier, editor of the Blue Chip Growth Letter, who wrote:

"Ross Stores is the second-largest off-price apparel retailer (behind TJX Companies) and operates about 1,000 Ross Dress for Less and DD's Discounts stores throughout 27 states and Guam. The stores sell mostly closeout merchandise, including men's, women's and children's clothing, at prices well below those of department and specialty stores. ... Although high gasoline prices hurt other retailers, they actually benefit deep discount retailers like Ross Stores by typically increasing its customer base. As an example, the company posted an impressive 10% April same-store sales gain, and its overall sales rose 14% to $651 million compared with $570 million in the same month a year ago. Ross just announced first- quarter earnings. The value retailer's sales increased 7% to $2.075 billion. Earnings reached $1.48 per share, a 27% increase from the $1.16 per share the company earned during the same period last year. ROST beat estimates on both counts. In its latest earnings report, Ross also announced that it reached a record operating margin of 13.7%. Looking forward, the company expects same-store sales to increase 2% to 3% in the second quarter, and earnings to come in between $1.15 and $1.20 per share. ROST is a Conservative stock and should be bought below $86."

Though the stock finally developed some weakness in the past week, it's still above its moving averages thanks to a strong bounce off of earnings in the early part of the downturn. If it breaks down further, that's a bad sign, but it's worth watching in the meantime.

Finally, we have CARBO Ceramics (CRR), which made its second appearance in the Investment Digest two weeks ago. Much like Eastman Chemical, CRR has been rising remarkably consistently ever since the beginning of 2009, so it's attracted its fair share of attention. But the stock's resilience since the beginning of May--it's only 12% off its all-time high--proves there are still plenty of buyers of CRR. CARBO makes ceramic proppants, very small spheres (like sand) that are injected into the spaces in fractured rock to increase oil and gas yields. The company is the undisputed leader in the market, and the market is growing rapidly as "unconventional" oil and gas plays become economically competitive. This is a sector that's unlikely to be derailed by anything, as CRR's chart suggests.

By the way, CRR is only one of many stocks benefiting from increasing demand for unconventional energy sources--it's been a great place to find gains all year, and as CRR's resilience demonstrates, it's not slowing down. Several of our Digest contributors will actually be discussing these energy sector game changers in an exclusive webinar later this month. The speakers include frequent Dividend Digest contributor Roger Conrad, editor of Utility Forecaster and The Canadian Edge, the Wall Street Sector Selector's John Nyaradi and Cabot Global Energy Investor Editor Brendan Coffey. If you want to know how to find other future leaders of the energy sector, like CARBO, the webinar will be a great opportunity to hear from these experts and ask them questions yourself.

You can learn more about the webinar--and secure your spot with our early bird special rate, which expires on June 18 at midnight--by clicking here.

Wishing you success in your investing and beyond,

Chloe Lutts
Editor of Investment of the Week

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