INVESTING: Somnambulant stocks a good buy for patient investors

The longer the base, the higher in space. For any technical analysis geeks out there (like me), this phrase brings visions of money raining from the skies.

Stocks that have moved sideways for years or have been stuck in trading ranges can, under the right conditions, unlock massive wealth. The trick is to find these gems.

Extremely long-term trading ranges exist because investors typically forget about the stock. The owners are frustrated but don’t want to sell, so they figuratively stick the shares in a drawer. Those still motivated to sell are slowly taken care of over the years, until there is no one left to sell.

A stock in this position could spend six years trading between $20 and $25 a share. Then, one day, the stock drops to $20 due to lack of interest, and there are no sellers around. A minuscule amount of buyers shows up around $20 per share and the stock quickly moves back to $25, the top end of the six-year range.

One buyer from the $20 level becomes excited with the quick move and decides to buy just a little more. Then, bam! The stock breaks above $25 for the first time in years, and the race is on.

There are all kinds of reasons investors can forget about certain stocks, but the primary explanation for unloved shares is the economy is juicing other areas, and most of the investing dollars chase what’s hot and popular. Think back to the late ’90s. Tech was the rage and investors were loaded to the gills with tech stocks. The bricks and mortar of the economy was ignored for years, but the shares of old world economy stocks still traded.

Then, at the 2000 top, people had as much tech sector as they could possibly buy, but few investors owned any basic materials, energy or machinery stocks. Jumping to the present, take a look at what the better-performing sectors have been lately: energy, basic materials and machinery. The worst? Even five years after the top, technology is still at the bottom of the barrel.

I did some digging around and pulled up a few stocks that have recently broken out of multiyear bases. Due to the amount of time it took these stocks to break out, it easily could be years before they run out of steam. And on a short-term basis, they could seem to move up and down with no better explanation than random noise.

The first stock dovetails with what I said a few weeks ago about the potential for Japanese stocks over the next few years. Honda Motor Corp. broke out of a five-year base a few months ago. The stock traded between $15 and $23 until finally breaking out last September.

Another company that fills the long-termbase bill is Franklin Resources. This is the mutual fund company behind the Templeton Brand. This base lasted almost seven years and it just broke out in November.

If my theory holds that Asian markets could keep performing even after we enter our next bear market, the breakout in this company makes sense. Templeton is a well known brand for managing highquality foreign mutual funds.