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Three New Stocks Ready to Grow Spring Profits


Fortinet, Radware, and Molycorp should now be on every investor's radar.

Editor's Note: This article is written by Gil Morales and Dr. Chris Kacher, co-founders of Virtue of Selfish Investing and co-authors of the new book "Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market." Also see the video interview with Minyanville's Josh Lipton, Stock Picks With O'Neil Disciple Dr. Chris Kacher.

Spring is fast approaching, and while young people's fancy may turn to thoughts of love, savvy investors would be better served by turning their thoughts to stocks that are new to the garden and ready to grow from fledgling "shoots" into blooming market flowers.

Any healthy bull market is characterized by the emergence of numerous strong young companies that have their feet firmly planted, ready to blossom into positions of strength in their particular market niche. We like to describe such companies as "new merchandise," and we've identified three in the current market that could be ready to produce profits worth plucking.

Two of these companies have only come public in the past 18 months, while the third has been around for more than 10 years but is just now beginning to hit its stride. They are:

Fortinet Inc.
(FTNT), recent price $41.70
This stock went public in November 2009, is the world's number-one provider of Unified Threat Management (UTM) solutions, and is rated "Best in Class" among network-security firms around the globe. Fortinet's systems, tailored to both small and large businesses, provide multiple levels of security, including firewalls, virtual networking, anti-virus, intrusion prevention, Web filtering, and anti-spam programs.

The company booked revenues of $324 million in 2010. It tops among network security providers serving the United States, Western Europe, Asia Pacific, Japan, and the Rest of the World ("ROW," as it is known) -- adding to its 19-quarter string of market revenue leadership. The company is also the overall global leader in UTM enterprise revenue.

With the "cloud" -- the network environment in which today's fastest-growing computing wave operates -- growing ever larger, network security is an increasingly critical function, and is likely to become even more so going into the future.

Fortinet has strung together three consecutive quarters of accelerating earnings growth -- 10%, 21%, and 57%, respectively -- and is looking to extend this streak with a 75% increase when it reports its next quarterly earnings. Sales have also continued to expand at a strong clip, and the stock's price action reflects its strong fundamental position.

Investors should view any pullback in Fortinet below the $40 price level as a strong buying opportunity as we would expect the stock to hold above levels achieved following the recent breakout through the $34 price level.

Fortinet continues to trend higher after breaking out through the $34 price level in early January 2011.

The cloud-computing theme also figures strongly in our second pick:

Radware Ltd. (RDWR), recent price $40.69
Radware's business as a manufacturer of network gear has evolved strongly as the idea of hosting applications and information in off-site data centers (the "cloud") gains favor with its customer base.

Radware's products include application-delivery controllers, which essentially function as network "traffic cops," guiding users to available servers for the purpose of maintaining network speed and efficiency. The company's products also help secure networks from potential hackers and other network attacks at what is known as the "gateway," or the point at which users enter a network through the Internet or another connection.

Radware turned profitable seven quarters ago, and since then has put together an impressive string of strong quarterly earnings growth. Income for the most recent quarter came in at $0.29 a share, representing earnings growth of 38% -- and the company should further raise the bar next quarter when analysts expect it to report a 50% increase in earnings growth.

The stock is just beginning to emerge from a 20-week sideways price consolidation, or "base," and we would expect it to hold the low $40s or high $30s on any pullback from mid-February price levels, providing a solid buying opportunity.

Israeli company Radware was just beginning to emerge from a 20-week consolidation period in the latter half of February.

Molycorp, Inc. (MCP), recent price $44.86
This company takes us from the lofty realm of "cloud" computing to the opposite extreme -- rare earth metals, which have become a hot topic of late because of China's control of most of the world's production of these scarce, but very essential mineral resources. Molycorp merits attention in this discussion because it's the only producer of rare earth oxides in the Western Hemisphere, currently ramping up production at its facility in Mountain Pass, California, one of the world's richest and largest rare earth deposits.

See What You Need to Know: Rare Earth Metals for some background.

Rare earth metals are used in a variety of "green energy" applications, including solar cells and batteries for hybrid vehicles. They are also found in a broad number of electronic devices, from cell phones to laptop computers and weapons used by the US military, including Patriot missile-defense systems. As such, demand will only be increasing in the years ahead.

That bodes well for Molycorp, which has yet to show positive earnings, but is expected to reach profitability soon. Analysts estimate the company will earn $2.60 in 2012, and nearly double that number by 2013, netting $4.79 a share.

After coming public in July 2010, the stock rocketed as high as $62.80 a share, but recently has pulled back as it consolidates its prior heady gains from the $14 IPO offering price. As the chart shows, the stock is building its first real consolidation since going public, and could "undercut" (i.e., move below) the $40 price level, which represents near-term support. Investors could view MCP under $40 as a buying opportunity with the idea that it should not move more than 10% below their entry point under the $40 price level. If the stock holds above $40, then an alternative entry strategy given our methodology would be to look for a breakout through the mid-point of a potential "W" formation, at 55.71, as shown below.

Molycorp is working through a 10-week "cup-with-handle" consolidation and could offer a buying opportunity on either a breakout or a pullback to the $40 area.
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No positions in stocks mentioned.

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