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Why LinkedIn Became One Of The Great Stocks Of 2013

LinkedIn (LNKD) was one of the first stocks to break out of a sound base in 2013. It more than doubled over the next eight months.

Why feature this company now? You can learn a lot by studying winners in recent history.

The next several columns will highlight how IBD featured these big market leaders before they broke out, and the fundamental and technical background behind each breakout.

The company, which went public in May 2011, operates a social network platform where users share their professional identities. The stock set up in a cup-with-handle base and broke out Jan. 10 past a 117.42 buy point in big volume. It appeared on Investors.com that day in the Stocks on the Move screen and was profiled on IBD's New America page.

The fundamentals were solid and the technical characteristics good. The EPS Rating was a best-possible 99; the Relative Price Strength Rating was 83 and the Accumulation/Distribution Rating was B.

The five-year annualized growth rate exceeded 100%. Analysts were forecasting a 106% EPS increase in 2012 and a 78% gain in 2013. Actual earnings growth turned out to be 154% in 2012. Analysts now look for 2013 EPS to be $1.61 rather than the $1.28 they forecast at the time.

The fundamentals were deficient in a couple of areas. The return on equity was only 11%, below the 17% standard investors should seek. Pretax profit margins were also only 11%.

Investors should be demanding about buying only companies with nearly all the characteristics of the CAN SLIM system. But sometimes one or two factors can be overlooked, especially in the case of LinkedIn, where the previous quarter's EPS rose 267% on sales growth of 81%.

It was the No. 1 stock by EPS growth in the Internet-Content industry group, then ranked No. 74 out of 197 groups tracked by IBD. That group would be a strong performer.

To validate your own analysis of the company, check to make sure at least one of the country's top stock pickers is already in. It turned out that the Fidelity Contrafund, Fidelity OTC Portfolio and Marsico Columbia 21st Century funds all owned shares.

The number of funds in the stock had increased over the previous year from 411 to 758.

On Feb. 8, after a spectacular earnings report, the stock gapped up and gained 21% for the day. It didn't look back after that.