To Rada, Or Not to Rada, That is the Question (RADA)

To paraphrase the great southern novelist William Faulkner, individual stocks are frequently filled with sound and fury, apropos of nothing. In other words, traders and investors often get worked up over companies that have a great story, or some other attention-grabbing news. When push comes to shove however, those shares aren’t ultimately worth much after the rubber hits the road.

One issue that has been filled with sound and fury lately — along with a rising share price — is Rada Electronics Industries, Ltd. (RADA). All of the high-profile trading action around RADA’s stock price, which was ignited by the company’s most recent highly promising earnings report, raises the question: has Rada’s performance and future prospects suddenly made the stock a valuable commodity, or is the eye-catching parabolic rise in both share price and trading volume little more than momentum-induced sound and fury?

First, some basics about the company: Rada Electronic Industries Ltd. develops and sells a wide range of defense electronics to various air forces and companies worldwide. Its product offerings include data/video recording and management systems, including flight data recorders for fighter aircraft; digital video/audio/data recorders with data transfer functions; high-rate data recorders for aircraft and airborne pods; video recorders and airborne data servers; a range of head-up-displays color video cameras for fighter aircraft; and various ground debriefing solutions.

Rada also provides inertial navigation systems (INS), such as fiber optic gyro based navigation-grade embedded GPS-INS; micro-electro mechanical systems (MEMS) based multiple-sensor aided INS for combat platforms and weapons; modular avionics and MEMS-based INS for unmanned aircraft vehicles (UAVs) and disposable applications; and inertial measurement units — along with other products and services.

On September 8, RADA released its Q2 results that lit a fuse under the company’s shares that has continued to burn almost one month later. For the period the company reported a 23% year-over-year revenue increase to $6.4 million from $5.2 million. Net income totaled $385,000, or $0.04 cents a share, compared to a net loss of $935,000 or ($0.10) cents a share in the same period in 2013. Gross profit surged 164% year-over-year to $2.04 million from $0.8 million.

Market participants greeted the report with frothy buying interest, parabolically pushing the stock up to a new 52-week top of $6.20 per share over a two-day period. Just days earlier the stock had been meeting stout resistance at $1.50 per share for months, with little buying interest to speak of.

As you can see from the chart below, that all changed dramatically in the wake of the earnings news. In part, the rocket rise in RADA’s share price was obviously fueled by the issue’s mini-float of about 5 million shares, and goes a long way in explaining why the shares tripled in price within a 48-hour period. That said, the tiny float doesn’t fully account for the ongoing massive trading interest in the issue several weeks later.

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During the past two trading days alone, traders have churned through more than 30 million shares — a whopping 21.8 million to begin the trading week, followed up by 9.1 million on Tuesday. Things got so wild in the RADA trading pit Tuesday that company management felt compelled to issue the boilerplate response to the unusual trading action, stating that it knew of no material developments that might account for the unusual trading action in the stock.

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From where I there may be other good reasons why RADA shares have been in buyers’ crosshairs besides the mini-float. Most notably, the company has strategic relationships with a virtual who’s who of defense industry elites. Rada’s clients include Embraer S.A., Lockheed Martin Corporation, Rafael Advanced Defense Systems Ltd., Israel Military Industries Ltd., GE Aviation, and Israel Aerospace Industries, as well as Boeing Defense, Space & Security, among others.

Of course, it’s impossible to put a definitive value on any company’s share price, as that value is informed by so many rapidly changing factors. For example, after RADA began to ramp up in price Tuesday on outsized trading volume, the company’s mid-session statement that it knew of no reason for the unusual trading action acted as a damper on the share price, driving RADA down to a $2.98 close, off almost 19% from the day before.
That said, in RADA’s case, I strongly believe that where there’s smoke, there’s fire. Trading interest may die down in the shares, along with the stock price — a common phenomenon given such a sudden surge in market cap, and all of the speculative money in play.

That said, all it would take is one significant contract, or another impressive earnings report, for this issue to reappear on Nasdaq’s percentage gainers list at some point in the future. In fact, I believe that RADA’s shares have been “re-priced” higher for good reason, and will ultimately continue their ascent once the mo-mo dust has settled.
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From where I there may be other good reasons why RADA shares have been in buyers’ crosshairs besides the mini-float. Most notably, the company has strategic relationships with a virtual who’s who of defense industry elites. Rada’s clients include Embraer S.A., Lockheed Martin Corporation, Rafael Advanced Defense Systems Ltd., Israel Military Industries Ltd., GE Aviation, and Israel Aerospace Industries, as well as Boeing Defense, Space & Security, among others.

Of course, it’s impossible to put a definitive value on any company’s share price, as that value is informed by so many rapidly changing factors. For example, after RADA began to ramp up in price Tuesday on outsized trading volume, the company’s mid-session statement that it knew of no reason for the unusual trading action acted as a damper on the share price, driving RADA down to a $2.98 close, off almost 19% from the day before.
That said, in RADA’s case, I strongly believe that where there’s smoke, there’s fire. Trading interest may die down in the shares, along with the stock price — a common phenomenon given such a sudden surge in market cap, and all of the speculative money in play.

That said, all it would take is one significant contract, or another impressive earnings report, for this issue to reappear on Nasdaq’s percentage gainers list at some point in the future. In fact, I believe that RADA’s shares have been “re-priced” higher for good reason, and will ultimately continue their ascent once the mo-mo dust has settled.
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As always, trade RADA and all other stocks with caution, as market forces can overwhelm even the best-laid plans of mice and men.

Warren Gates, Senior Analyst, Normandy Research 

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