New Buy:(PWRD)

It was another interesting week in the market with the FMOC meeting, job numbers, consumer confidence, and other economic data. As it's done the past few meetings, the market picked one direction after the Fed released the news of the rate cut (in this case down) only to reverse the next day and have a very strong move up.

We are still in a confirmed uptrend since the follow through day that occured on March 20th, and with the S&P 500 finally clearing 1400, and the major indices have passed the significant resistance areas which should now act as support.

There does appear to be a rotation of market leadership. The commodity stocks are flashing some warning signs and have had a difficult couple of weeks. Technology has stepped in along with retail and even financials this week. In the top 20 Industry groups (as tracked by IBD) I've not seen any compelling opportunities - it is mostly made up of extended groups (oil) or old leaders ready to roll over (agriculture).

As I mentioned on Monday though, I saw movement in the Chinese stocks in the Internet-Content group and I bought (SOHU), which is doing well so far - I'm up 14%. When I buy a stock I track members of the same group in order to keep a feel for the strength of it, so I put (JRJC), (PWRD), (SNDA), (GA), and (SINA) on my watchlist. They were all acting very well, so last night I decided to take another close look at the group and see if there was another buying opportunity.

The first thing I did was export a list of every stock in the Internet-Content industry group to a spreadsheet where I could filter the data a bit. I removed any stock with an SMR (proprietary IBD rating which measures a stock's Sales, Profit Margins, and ROE) below C - this cut the list from 36 to about half that. Then I removed the stocks that had an EPS rating below 70 and removed the few remaining US companies in the group. I was left with 8 Chinese companies, the 6 listed above, (BIDU), and (NTES).

I already own (SOHU) so I began looking at the rest. I eliminated (BIDU) because it is a former leader and has a forward PE twice that of any other stock in the group at 56. I do not use a PE to measure a stock's worth, but I will take into account a stock's forward PE relative to it's group mates as I think it helps determine which stock might have the most growth potential. This is something I may change or do away with over time.

(NTES), (SNDA), and (SINA) do not have the eps growth (historical or estimated) that the others do and were therefore fairly easy to eliminate from consideration as well.

This left me with (JRJC), (PWRD), and (GA). All are recent ipos and excellent prospects, and all have some flaws.

(JRJC) is phenomenal fundamentally, with triple digit earnings and sales growth quarter after quarter. It's forward PE is the lowest of the group at 12. It's problem, I believe, is technical. Last fall this stock rocketed from $13 to $45 in just a couple of weeks. Then over the next 6 months it came all the way back to $13. Of note is the fact that the stock saw relatively little high volume down weeks (3, to be exact) for a drop like this, but that is small consolation for a round trip. When a stock corrects that drastically it creates a large overhead supply which causes resistance as the stock tries to rally. In simple terms, the guy who bought 3 months ago at $25 is looking to get out even, so he sells when the stock gets close to that. Only instead of that one guy, there's a bunch of them all the way from $45 down to $13 looking to get out. For that reason, I passed on JRJC - though honestly I think it will perform well.

(GA) is a great looking stock I'll keep on my watchlist, but it broke out on Monday past a $13.44 buy point off a double bottom with high handle pattern and was already up to $16. I could've bought as much as 5% past the buy point, but that was 14.11. Still, this is (GA)'s first base since it's IPO so if it does well it will offer another buying opportunity.

I think I like (PWRD) better anyway. It actually broke out Thursday from a 9 week cup pattern with a $30.10 buy point on triple it's normal daily volume. Fundamentally this stock looks great, the earnings and sales growth are triple digits the last 4 quarters and it's expected to double earnings in 2008. The up/down volume is 2 and the Accumulation/Distribution rating is A+ which both suggest strong institutional support, though the number of funds invested in the stock has dropped significantly in the past year, a red flag. (PWRD) boasts an ROE of 50 with no long term debt, though the cash flow is less than 10% higher than it's earnings.

The chart looks good, with the stock closing up on higher volume and down on lower volume most weeks. The relative strength line is making new highs already though the stock is not - this is a bullish sign.

All things considered, I decided to purchase (PWRD). With the buy point at $30.10 my suitable purchase price was from there to $31.61. The stock had closed the previous day at $30.97 and gapped up this morning and went to $32 almost immediately. I waited out my 15 minutes per my rule, and the stock did come back to 'fill the gap.' I got in at $31.58, and could've had it for less. I don't fool around too much looking for the perfect price though - if it get's within 5% of the buy point I will buy, otherwise it could just take off and leave me behind.

The stock closed up a little for me today, but I expect it will backtrack a bit at some point next week. If it comes back into the buy range in a health, low volume pullback I'll add shares around $30.85.

-Geoff