in a solid rally, don't be afraid of buying high-p

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    Investor's Business Daily
    In A Solid Rally, Don't Be Afraid Of Buying High-Priced Stocks
    Monday June 9, 10:22 am ET
    By Craig Shaw


    Price is no object, the saying goes. Keep that in mind when selecting growth stocks.
    Just as you'd invest more in a quality car or fine jewelry, you should generally pay a premium for stocks. You're better off with a few shares of a sound company than thousands of shares of an unprofitable basement-dweller.

    Some investors shy away from stocks priced at 50, 75 or higher a share. The value crowd seek "bargains." They theorize a low-priced stock is more likely to yield a quick double- or triple-digit gain. The problem is you often get what you pay for.

    Most institutional investors avoid cheap stocks due to their low liquidity. Mutual funds could cause big price swings with their bulk buys and sells. But institutional support is the key to a stock's run-up. Without the powerful backing of these deep-pocketed investors, a stock is far less likely to mount a sustained price advance.

    Cheap stocks are also highly volatile. They might score a quick percentage gain, but they can fall just as fast. You could find yourself facing a 15% or 20% loss in no time. And you may find it's tough to unload shares, given the stock's low liquidity.

    Stocks sell for what they're worth. The 95 best small- and mid-cap stocks of 1996-97 had an average price of 25.43 when they broke out. Ten percent were priced at 45 or higher, with the top stock above 78. The 25 best large caps of those years broke out with an average pivot point of 56.02.

    Instead of bottom-fishing, set your sights on stocks priced 10 or above. IBD's main tables limit stocks to that minimum price. Seek companies with superior earnings and sales growth, peer strength and innovative products or services.

    Lots of beaten-down tech stocks have doubled or tripled from low levels in the current rally. But you're better off waiting until they form sound bases at prices that attract institutional interest.

    Look at home builders. Spurred by record low mortgage rates, many leaders in the red-hot industry have broken out of price bases with pivot points of 50 or higher and logged double-digit gains. Amex-listed NVR Inc. recently topped 400.

    Nike was no cheap stock in 1995. Capitalizing on the NBA-inspired popularity of athletic shoes, the stock broke out of a 31-month base June 12 (Point 1). The firm scored earnings gains of 68% and 52% the previous two quarters after five periods of declines, lifting its EPS Rating to 88. Its RS Rating was 72.



    The stock's pivot point was 80.73, or 0.10 above the high of its handle. It had reached as high as 90.25 in forming the left peak of its long base (pPoint 2). Bargain-hunters wouldn't touch a stock at those lofty levels.

    They missed a winner. Nike sprinted into the triple digits within three months, gapping up 14% the week ending Sept. 22 (Point 3). It advanced 279% in 88 weeks.


 
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