To find the market's next big winners, sometimes it helps to take a step back and look at what worked in the past.
You can learn a lot and be ready to act if you see the same situation develop. At IBD's advanced workshops, founder William O'Neil often emphasizes this vital mental and visual training. He calls it "historical precedent analysis.
SolarWinds (SWI) was a big winner in 2012. It more than doubled before pulling back in September. The software maker fit the profile of many past market leaders and gave investors several chances to get on board.
SolarWinds' software helps information technology managers maintain data storage systems and communications networks. Unlike traditional software companies that use a direct sales force to peddle their offerings, SolarWinds operated on a Web-based sales model. While products from competitors such as Hewlett-Packard (HPQ), CA (CA) and IBM (IBM) can run into the tens of thousands of dollars, SolarWinds offers cheaper solutions.
SolarWinds delivered rising earnings for five straight years from 2007 to 2011. Even during the hard times in 2008, the company saw its earnings more than double. In the four quarters before it broke out in February, profit grew 21% to 48%. Sales climbed 25% to 39% over the same period.
The company had a return on equity of 35%, well more than the minimum 17% figure typically seen in past market winners.
Strong Technicals SolarWinds broke out of a second-stage cup base at 33.78 in the week ended Feb. 3 this year. (1) Volume was nearly three times its 50-day daily average on its day of Feb. 3. Its weekly turnover was also above average (2), showing solid institutional demand for the mid-cap's 74 million shares outstanding.
Although price action got choppy after the breakout, the stock again shot up in the week ended April 27 (3) in reaction to Q1 results that easily beat views.
SolarWinds again started a new consolidation. This time, it went on to form a third-stage double-bottom base with a 47.99 . It broke out of the pattern in the week ended July 27 (4) in almost double its average weekly . It ran up 27% before settling into a .