On Thursday, Nov. 15, FactSet Research Systems (NYSE: FDS), a provider of financial information and analytics to the investment community, declared a regular dividend, and the stock rallied 3.85% on big volume.
While the $0.31 quarterly dividend, which currently yields 1.4%
annually, may not seem like a big deal, it may have been good enough to
place a medium-term bottom in the stock price.
The longer-term FDS
chart shows a massive rally to the tune of 260% from its 2008 lows to
the 2011 highs. Ever since the 2011 highs, however, the stock has traded
in a wide but narrowing trading range, which for now looks like a
the weekly chart below, note how the stock fell slightly below this
consolidation phase two weeks ago, but with last week's strong intraweek
reversal, has indicated that the slide may have come to a halt.
With the weekly chart looking supportive, let's delve deeper into the signs on the daily chart.
On Nov. 15, the stock traded roughly 940,000 shares.
When compared with average daily volume for the past 15 days of around
340,000 shares, that is a significant increase and adds further support
to the day's rally.
In terms of price, the stock left a major
outside day, or engulfing candle, on the chart, with the daily candle
fully engulfing the previous six candles/days. Further, it was good to
see that the intraday
bid on Friday, Nov. 16, kept the stock from giving up much of
Thursday's gains. While we have not yet seen follow-through buying on
the back of Thursday's rally, the fact that the stock managed to hold
its own on Friday is good news for bulls.
Looking at the stock's momentum, we find significant positive divergence between the stock price and its stochastics indicator. Stochastics
bottomed in mid-October, while the stock kept moving lower until
Wednesday, indicating that downside momentum had slowed and the stock
was due for at least a snapback rally.
fact that FDS developed a strong engulfing candle at a point where
momentum was positively diverging from price sets the stock up for a
high-probability long-side trade in my book. While we have yet to see
follow-through buying, and thus, final confirmation that a long-side
trade has set up, to me the aforementioned points make a strong enough
case that the trade is valid.
So what is the first potential upside target?
way in which I use the 50-day, 100-day and 200-day simple moving
averages is to gauge how far a stock has veered from its medium-term mean.
In the case of FDS, the stock has moved far enough from these moving
averages that a mean-reversion move may be in order. As such, a first
target could be a move back to near the 50-day and 200-day simple moving
averages, currently around the $94.50 to $96 area by year-end.
Beyond that, the next two upside targets would be $98, which is the 61.8% Fibonacci retracement level of the swing from the Sept. 14 high to Nov. 16 low, and above that, the $100 mark.
combination of buy signals described above now creates a compelling
trade to the long side in FDS. Major engulfing candles forming at
oversold levels are a strong sign that, at least for a short- to
medium-term trade, the trend has changed. In addition, when the dividend
is paid on Dec. 18, it may act as further support for the stock. Recommended Trade Setup:
-- Buy FDS at $91.50 or less -- Set stop-loss at $87, the clearly defined low from Thursday, Nov. 15 -- Set price target at $96 for a potential 5% gain by year-end
While it may still be too soon to say whether or not the housing
market has fully recovered, things are looking up. On November 19, 2012,
it was announced that existing home sales increased 2.1% in October
from the previous month. Homebuilder confidence also rose to its highest
level since 2006. (Source: Puzzanghera, J., “Existing-home sales and
builder confidence rise,” Los Angeles Times, November 19, 2012.)
November 20, 2012, government data showed that construction on new
homes rose 3.6% in October, the highest rate since July 2008. Starts are
also up 42% from last year. (Source: Mantell, R., “Housing Starts
Highest in More Than Four Years.” The Wall Street Journal/MarketWatch, November 20, 2012.)
While the new home starts are a boon to new homebuilders, it’s also good news for those companies that supply the industry.
Builders FirstSource, Inc. (NASDAQ/BLDR) is a penny stock
that manufactures and supplies structural and related building products
(lumber, windows, trusses, doors, etc.) for residential new
construction, primarily in the southern and eastern United States.
Customers have included D.R. Horton and Hovnanian Enterprises. Builders
FirstSource has grown through acquisitions to operate about 52
distribution centers and 47 manufacturing plants in nearly 10 states.
October 18, 2012, the penny stock announced that revenue for the third
quarter ended September 30 was up 34.3% at $291.8 million. Builders
FirstSource’s third-quarter loss from continuing operations widened to
$12.3 million, or $0.13 per share, from $11.5 million, or $0.12 per
share, in the same quarter a year earlier. Year-to-date revenue was up
33.5% at $783.0 million. The penny stock’s year-to-date loss from
continuing operations narrowed to $43.3 million, or $0.46 per share,
from a loss of $47.9 million, or $0.51 per share, in 2011. (Source:
Press release, “Builders FirstSource Reports Third Quarter 2012
Results,” Globe Newswire, October 18, 2012.)
Company CEO, Floyd
Sherman, noted, “For the second consecutive quarter, we reported
positive Adjusted EBITDA [earnings before interest, taxes, depreciation,
and amortization], finishing with $3.0 million for the current quarter,
as compared to an Adjusted EBITDA loss of $0.7 million in the third
quarter of 2011, and on a year-to-date basis, our Adjusted EBITDA has
improved from a loss of $11.7 million in 2011 to positive $3.0 million
in 2012.” (Source: Press release, “Builders FirstSource Reports Third
Quarter 2012 Results,” Globe Newswire, October 18, 2012.)
Chart courtesy of www.StockCharts.com
FirstSource’s share price has been trending higher since November 2011
on strong back-to-back double-digit revenue growth, and speculation that
a housing market recovery is in bloom. The penny stock’s 50-day moving
average crossed over the 200-day moving average in late January; a
bullish sentiment. During the same period, volume has also increased.
FirstSource is a financially solid company, with growing revenues and
expanding operations. Over the past five quarters, the penny stock has
reported double-digit year-over-year percentage revenue growth.
First-quarter 2012 revenue was up 34% at $219.4 million, while
second-quarter revenue was up 31.7% at $271.9 million. Third-quarter
revenue was up 34.3% at $291.8 million. And, for the second consecutive
quarter, Builders FirstSource reported positive adjusted EBITDA.
forward, Sherman added, “We expect the momentum we’ve achieved from the
improvement in the housing industry and our recent market share gains
to continue to positively impact our operating results. We remain
focused on growing market share and improving our margins in order to
drive profitability as the market continues to recover.” (Source: Press
release, “Builders FirstSource Reports Third Quarter 2012 Results,”
Globe Newswire, October 18, 2012.)
While Builders FirstSource’s
share price is still susceptible to fluctuations in new home build and
existing home sales, the penny stock could experience a boost in the
second and third quarter of 2013, when demand for construction supplies
is expected to materialize with the rebuilding efforts related to