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Newly public companies are often among the market’s best price leaders, says Gil Morales, who in today’s interview shares his thoughts about two recent IPOs that he believes could be big upside gainers in the future.

Kate Stalter: Today the advisor we’re speaking with is Gil Morales, and he is managing director of Virtue of Selfish Investing in Playa Del Rey, California. Thanks so much, Gil, for joining us today.

Gil Morales: Thanks for having me, Kate. Nice to be here.

Kate Stalter: I’d like to start out by asking for your take on the current market conditions. What do you believe individual investors need to know about right now?

Gil Morales: Well, I think what we’re seeing right now is an interesting dynamic, in that the crowd seems to be expecting that all this deficit-ceiling or debt-ceiling madness is going to stop, and then the market will rally like mad once the debt ceiling agreement is reached.

The way we’re looking at this is that there’s a lot of underlying turmoil, almost as if the market has this treacherous undertow, and that you’re really seeing a bifurcation between winners and losers in this market. So if you’re long stocks going into earnings, we kind of see it as playing “earnings season roulette” to some extent.

You see some big winners after earnings, like Apple (AAPL), Amazon (AMZN), Google (GOOG), Green Mountain (GMCR), and Baidu (BIDU), for example. Today, I think Deckers (DECK) is trying to turn, and Expedia (EXPE) is. Priceline (PCLN) on that basis, which has been a big leader, is also trying to turn.

It’s interesting that these are all big Nasdaq stocks, but these kind of stand in stark contrast to a number of other leading stocks that have been earnings roulette losers, as we might say. Offhand, I’m thinking Netflix (NFLX), Caterpillar (CAT), Panera Bread (PNRA), and Travelzoo (TZOO).

It’s kind of the inverse of today’s move in Expedia. Tupperware (TUP), Riverbed Technology (RVBD), F5 (FFIV), and Illumina (ILMN), which was a very strong leader. There are a number of these, and the list goes on and on.

It’s kind of bifurcated in this manner, so you’re seeing this underlying weakness. The rally that we had recently, the market pulled back and ran up off of its 50-day moving average over the last, I’d say two weeks ago. It bounced off the 50-day, and on that rally back, we were watching it very carefully, and breadth was deteriorating very sharply at that time, which is interesting.

Of course, we’re kind of seeing the after-effects of that in this breakdown that took you below the 50-day in the Nasdaq, but was trying to hold intraday. So it’s kind of in a no man’s land right now. Very choppy market, and we’re very cautious on stocks.

We think you have to be not necessarily a good stock picker but, to some extent, a lucky stock picker going into what we call earnings roulette season. So really for us right now, we’re focused on the precious metals, the silver and gold ETFs, which recently broke out through buy points—silver at around $36 on the futures and gold at around $1,559. So we are actually long in metals in every way and everywhere. We’re holding that.

We think that will tend to benefit no matter what happens here on this debt-ceiling agreement. We think you might get a little sell-off in precious metals that we would buy into.

But we think that in the long-term what they’re really doing is continuing this sort of Ponzi scheme, and by raising the debt ceiling they’re enabling the Ponzi scheme to continue. This is a spiral, really, of borrowing and spending that really seems to have no end in sight, and that will devalue the dollar, which we think is positive for the precious metals.

Kate Stalter: Now you mentioned the metals and that being an area that you believe is showing some strength. What about areas that individual investors should completely avoid right now?

Gil Morales: Well, I think you’re seeing a lot of weakness in semiconductors. They’re kind of choppy here. The Philadelphia Semiconductor Index (SOX) has been moving lower, into lower reaches of the base. Some technology names have also been very weak: the cloud-computing stocks, the cloud-computing networkers specifically, and that would be stocks like F5, which I cited earlier, have been very weak.

Aruba Networks (ARUN), which is a former leader, has been very weak, and a lot of these areas look like they need a lot of work to do before they’re going to be healed and perhaps ready to base again. But it is interesting that technology is often cited as an area of strength. You are kind of seeing a bifurcation.

A big consumer tech name like Apple, that does pretty well here, but I think that’s a very liquid name and institutions favor it, and they’re growing their business still like gangbusters.

But all the other little techs here and there, I could go down the list: Tibco (TIBX), Cavium Networks (CAVM), even Research In Motion (RIMM) is continuing to be weak. Finisar (FNSR) was one that was hot and has broken down. One by one these have all come up. We don’t really like certain areas of tech.

I think it’s very kind of murky, and really, in terms of stocks in general, there aren't any areas that we see specifically as being areas to plow into. Again, we are playing this market primarily through the precious metals.

Kate Stalter: Are there any stocks out there right now, Gil, that you believe are worth researching as possible watch list candidates?

Gil Morales: Well yeah, there's always interesting new technology, and really this is kind of the essence of where we come from when it comes to the market.

We live in an entrepreneurial economy. The US is an entrepreneurial economy. That's what's wrong with it right now. We have a government that does not promote the entrepreneurial aspect, and when you think about it, 70% of employment comes from new businesses. That's these entrepreneurs, you know?

So you always want to be on the lookout for entrepreneurial companies, because they will be emerging even in the face of a lot of government restriction, which we think is testimony to its strength if the government got off of everybody's backs.

We're always looking for new technology. There's a very interesting company that I'm keeping my eye on right now. It's Fusion-io (FIO).

I think the chief scientist for the company is Steve Wozniak, who was Steve Jobs' partner when they founded Apple way back in the late 1970s or early 1980s. What this company is doing is revolutionizing data storage, moving it off of disk drives and onto flash drives, and Apple has been a partner with Fusion-io, as have several other big-name companies.

They are a provider of a lot of technology to Facebook, which has been about 47% of their business, but their technology in my view is so compelling that I think that having Facebook as a very large customer, while that might be cited as a weakness, I think that in fact that tells you that they can get a lot of business from one customer and that they can start to multiply that by two, three, four, or five customers, you can see a sharp jump in their business.

Right now, the company has just become public, and so it's working its way through what looks like, you could say, anywhere from a two- to four-week base, depending on how you want to look at it. It needs some time to sit up, but this is forming a base. We really like the technology, and so we would keep an eye on this stock, and probably the one that we're looking at the most.

We also think LinkedIn (LNKD) is another stock to keep an eye on. Yesterday it had a bizarre move, trying to break out to the $110 level, but if you look at the pattern, it came straight up off the $60 level after hitting a high of $122.70 on the day that it came public, so really that's a 50% drop.

You know, like I do, a cup pattern of 50% generally is going to need more time on a handle before it's ready to break out. So, yesterday's breakout was likely premature. I think if the stock can hold the low $90s here on a pullback and build a handle, you should keep an eye on it.

LinkedIn, I think, has technology that people will use to look for jobs, and the next inflection point in the job market has to be the upside within the next year, I believe. Because we'll have new political leadership, hopefully, by the next election, so I think that LinkedIn will be in a position to take advantage of a growing market of people looking for jobs.

As it is now, they are the No. 2 social networking site on the Internet, right behind Facebook. So those are two ideas I like.

Read more about Gil Morales' investment firm here…

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