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The Hunt For Tomorrow's Top Performer

05/16/12 10:11:41 AM
by Billy Williams

Even in bad economies, there are companies that can excel and outperform the market such as this compelling stock.

Security:   SPX, LKQ
Position:   Hold

The overall market stagnates within a correction that began early in April after an initial decline and a failed runup to the high before rolling over again in May, only to challenge the previous lows. How much lower will the market go? It's hard to say, but while you wait for the signs to unfold, that will help you glean whether the market will trend lower or reverse its course; diligence requires that you prepare for both scenarios -- namely, to keep a watchful eye on stocks that are holding up and showing strength in the face of the overall market's weakness, so that if the market does resume its upward move, you will have a list of potential long candidates to ride the next wave higher.

In a downward economy, especially one where downward pressure on wages is in effect, it is practical for people to look to limit expenses and become more hands-on with projects at home and car repairs. These conditions unleash the inner handyman and mechanic in many in order to save money and use their dollars for other things. This is one reason why hardware stores and do-it-yourself chains such as Home Depot do well even in bad times.

FIGURE 1: SPX. At the moment, the SPX and the overall market is in a correction phase where its price action stagnates in a period of contraction.
Graphic provided by:
In that vein, LKQ Corp. (LKQ) is booming by providing replacement parts, components, and systems needed to repair cars and vehicles. It distributes aftermarket collision and mechanical products, recycled collision and mechanical products, and refurbished products such as heels, bumper covers, and lights, and remanufactured engines to collision and mechanical repair shops.

The company also offers recycled products, including engines, transmissions, doors, front-end assemblies, trunk lids, bumper assemblies, head and tail lamp assemblies, and mirrors. In addition, it sells scrap metal and other materials to recyclers, as well as recycled heavy-duty truck products and used heavy-duty trucks. Further, Chicago-based LKQ, which was founded in 1998, operates self-service retail facilities that sell recycled automotive products. The company principally serves collision and mechanical repair shops, new and used car dealerships, and metal recyclers, as well as retail customers.

FIGURE 2: LKQ. Still, despite the down market and weak economy, stocks like LKQ exhibit strength as well as compelling fundamentals. While you shouldn't jump into this stock now due to the overall market's lack of direction, this stock could be a serious long candidate if the market falls under the control of the bulls once again.
Graphic provided by:
While its return on equity (ROE) is a bit low at 14%, LKG has experienced sales growth of over 30% in the last two quarters and annual growth of 28% due to the demand for its products. Flush with cash, it has purchased four related companies in its industry that have added to its bottom line and puts it in a strong position to maintain its competitive advantage even during a down cycle in the economy.

Due to its position and positive future outlook, LKG has been under steady accumulation by institutional investors including four top mutual funds -- MFS Growth, Fidelity Contrafund, Dreyfus Mid-Cap Index Fund, and Columbia Acorn. This active interest in LKG is a confirmation that money managers believe that there is a lot of value in the company and that it is poised to appreciate in value even further.

LKG began to form a flat-base pattern from February up to April 25, 2012, when the market experienced a follow-through day and its stock price shot up. Following this spike, the stock continued to trade higher on heavier volume until it broke out above its previous high of $33.55 on April 27.

While at first glance this appears to be good news, it's not a good time to jump into the market on the side of the bulls while the market is still in a correction phase.

However, if the market finds its legs to the upside, stocks like LKQ should be on your watchlist as solid buy candidates because of the compelling fundamental and technical criteria that they possess.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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