Reasons for Selecting These Stocks Outperforming Sectors

The exchange sector has been on an upward move, and the stocks in this sector had the highest P/E ratios of any industry sector in November 2006. Consequently, on November 17, 2006, when the New York Mercantile Exchange listed its shares on the NYSE and on its first day of trading more than doubled from $59 to $150 per share, this was a good sign for a momentum investor. Believing that the Nymex’s stock price will perform in the same manner as the other exchange-listed stocks is a reason to jump onto the bandwagon. The Chicago Mercantile Exchange came public at $35 per share in 2002 and was trading at $535 per share on November 17, 2006.

Analyst Upgrade
The second stock, Google, Inc., was chosen based on analysts upgrading their price targets to $600 per share. Google, Inc., passed $500 per share on November 21, 2006, and closed for the day at $509 per share. Google’s stock hit a low of $331.55 on March 10, 2006, and has been on an upward tear. Such price strength appeals to the momentum-driven investor. However, momentum investors need to be mindful of how long this stock can continue to appreciate, particularly with increasing competition in the online advertising space.

Fundamental Factors
The key to successful investing is to identify companies with accelerating growth in sales and earnings that then translate into appreciating stock prices. This is easier said than done because by the time such a stock is identified, the stock price probably has appreciated significantly. Corning officials had positive announcements on its future quarter’s sales, which is a reason for this pick. Corning indicated that for the first quarter of 2007, the company could benefit from increased demand for liquid-crystal display (LCD) glass for TV sets from China and from households in the United States. The company also said that it would protect prices by walking away from lower-priced business.

Cisco Systems was another choice based on fundamental factors. Cisco purchased many businesses within the communications sector, allowing the company to broaden its sales and consolidate its leadership position. The stock price reacted to these fundamental factors but has not risen quite as much as some of the other momentum-driven stocks listed in Table 13–6.

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