June 1st, 2006

Cramer’s Orphans: BOOM, ELRC, NTCT, LAYN and EGY

Jim Cramer laid down the gauntlet and “challenged” his viewers out in “Cramerica” on his MadMoney show to select one of five stocks he labels as “orphans”. Some of the criteria for earning that label are:

  • cap of less than $500 million
  • little or no debt
  • followed by less than 2 Wall Street analysts
  • serial profit and organic sales growth
  • blah, blah, blah

But he never mentioned anything about the charts. Where have the stocks come from? Are they in industry groups that are currently in favor or not? Are the stocks in a favorable, potential breakout formation or or has the stock become extended?

Jim and I are both competitive. I’m no Cramer but I’d like to match my chart reading prowess against his fundamentalist approach. So which of the five would I select for outstanding growth over the next 12-24 months. Hopefully, we’ll all be around to see the results of this Fantasy Orphan Selection Challenge.

1. Dynamic Materials (BOOM) – this is no “orphan”. It has been on the IBD 100 nearly every week over the past year, the last time May 12, 2006 in the 86th rank. As a result, the stock has skyrocketed from the low-single digit level to around 30 over the past 18 months:

It’s a stock that definitely looks like it’s process of forming a top.

2. Electro Rent Corp (ELRC) – a candidate perhaps, but one now struggling a breakthrough the resistance trendline originating at the stock’s all-time high. The stock is in IBD’s Commercial Services-Rental and Leasing Industry Group, a group that may be adversely impacted by higher interest rates.

On the contrary, the deep 6-year double bottom illustrates a significant underlying business turnaround where a favorable breakthrough of the resistance trendline would lead to significant long term growth in the stock since anyone who’s ever owned the stock will be making money. I would, however, wait for the stock to signal that it’s a buy by putting in a price trigger alert if
and when the price hits 18 or more.

3. Netscout Systems (NTCT) – another excellent turnaround situation that has formed a classical ascending triangle. The stock hasn’t yet cleared the resistance trendline but if and when it does, the prospects are excellent for significant long-term price appreciation.

FYI: NTCT’s performance is typical of many over the first few years after an IPO. The stock will retreat from an overvalued IPO price and settle in at lower levels. An extended period of base-building takes place after which the stock then starts it’s true ascent. The probability of a stock’s continuing to rise after its IPO (like the past 2 years for GOOG; but watch out for its typical post-IPO retreat) is small and that’s the reason why I avoid IPO’s.

4. Layne Christensen (LAYN) – another perfectly formed head-and-shoulder bottom pattern …. but it was completed in 2003. The recovery has already been recognized and the stock has risen to 28, 180% over the neckline at 10.

This was a good orphan but not that would have been in December, 2003, not June, 2006.

5. Vaalco Energy (EGY) – has a long-term chart similar to most other Oil & Gas Industry Group stocks and clearly rode the wave that impacted every energy stock over the past 2 years.

But will this stock be a successful “orphan” stock with good long-term prospects if the rest of the industry retreats? I think not.

So which of the five would I select as the best “orphan” in Cramer’s challenge? I think it would be … NTCT …. but wait for the breakout. Let’s see what Cramer says???

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