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Companies: Apple Inc. Ctrip.com International Ltd. Given Imaging Ltd.

Key Traits Identify Market-Leading Stocks

On Thursday June 10, 2010, 4:28 pm EDT

It's easy to point out a leading stock after a winning run. But what are the characteristics of a leader in its

infancy, prior to making a big move?

For starters, a couple of simple points: A leading stock should trade a minimum of 400,000 shares a day on

average. And the share price should be above $10. Next, it is important to focus on leading stocks in top-

performing industry groups. Why? Because the big winners are nearly always among the top two or threestocks in a strong industry.

This doesn't necessarily mean the biggest or the best-known names. With a stock like Apple (NMS:AAPL), it

may be the case.

But usually, it means the stock showing the strongest quarterly and annual earnings and sales gains, the

widest margins and the highest return on equity, among other factors.

Generally, those stocks have set themselves apart from their peers through unique products or innovative

business models.

Sometimes they are companies that have restructured or revamped their operations, giving them more efficient

production, lower operating costs or an edge in the quality of their product.

For example, Intuitive Surgical (NMS:ISRG) developed and sells the innovative da Vinci robotic surgical

instrument. These space-age surgical tools reduce the trauma patients face during procedures by minimizing

incision sizes and maximizing surgeons' control.

As the stock broke out in July 2009, the company was rapidly increasing the breadth of its market among

hospitals and surgical clinics in the U.S. and preparing to expand into Japan.

But its leadership status came from more than an innovative product. The tightly managed company bore no

long-term debt and carried after-tax margins higher than 20%. Its earnings growth had accelerating after two

quarters of declines, rising 63%, then 80% in the two quarters just prior to the breakout. Sales during the same

periods rose 48% and 61%.

The group held other potential leaders, most notably Sirona Dental (NMS:SIRO), Given Imaging (NMS:GIVN)

and Mindray Medical (NYSE:MR- News). But Intuitive at that time carried the most gold-plated fundamentals.

One simple way to research leadership characteristics is by using the Stock Checkup at Investors.com.

This will tell you if your stock is among its industry's leaders in terms of key performance factors. It will show a

number of fundamental and technical factors you can use to compare it with others in the group.

In the travel booking industry, Priceline.com (NMS:PCLN) seemed like just one more travel Web site in early

2009.

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But from a performance perspective, Priceline and China-based Ctrip.com International (NMS:CTRP) were

clearly the leaders of the industry at that time.

In 2008, Priceline's operating cash flow per share was a strong 28% above annual earnings.

Its return on equity was 44% that year, while carrying no long-term debt.

Despite the slack travel environment, Priceline's quarterly earnings growth held in a range of 34% to 77%

through the year.

The stock's Relative Strength line was trending higher.

While many stocks in the group went on to post big advances in 2009, Priceline sketched the most smooth,

least volatile behavior as it knocked out a major advance until peaking in April.

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