In the stock market, there’s no such thing as a sure thing — an adage that proves true every trading day. There are, however, some tried-and-true trading approaches that tend to work year-after-year.
One of my favorites is playing breakout stocks that have pulled back significantly after making parabolic moves. That’s because these “former runners” usually make their breakout moves for good reason — generally good company-specific news that will have a positive impact on their bottom lines.
Today I want to bring your attention to two such issues that have recently broken out to new 52-week highs, then experienced a significant price pullback from those levels — with all three having the potential to find more buying interest in the months ahead.
Greenhunter Resources, Inc. (GRH)
GreenHunter Resources, Inc., provides water management solutions in the United States. It offers Total Water Management Solutions to the oilfield, including unconventional oil and natural gas shale resource plays. The company offers hydraulic fracturing services, as well as fluids handling, hauling, and barging services. In addition, it provides Frac-Cycle water treatment services and remote access management compliance asset tracking for remote activity observation via a Web-based portal for management of well-head fluids.
Greenhunter also sells and rents equipment and tanks, such as frac tanks, as well as MAG tank, a modular above-ground storage tank system, and owns, develops, and operates commercial salt water disposal wells for the injection of brine and other fluids related to oil and gas production. As of December 31, 2013, the company operated 12 SWD wells in Appalachia, South Texas, and Oklahoma shale areas.
Historically a super low-volume, range bound trader, shares of GRH rocketed higher at the end of last week and continued to carve out new 52 week highs earlier this week, touching an intraday top of $2.99 on some high volume, momentum-fueled buying. Behind the spree was a June 30th announcement that Greenhunter had executed three agreements for exclusive use of 34-miles of pipeline in the Marcellus Shale and Utica Shale play areas.
The parabolic move in GRH shares came on two massive volume trading days during which over 3 million and 4 million shares changed hands. But, as so often happens when a stock gains 50% in less than a month’s time, profit-taking has set in, with GRH sliding down to the $2.58 level in recent dealings on gradually declining trading volume.
While I expect this issue to do some more “backing and filling” to a lower price from current levels, my strong sense is that eventually there will be a propitious entry point for this stock to bounce back up from profit-taking lows as the market continues to price in the value of the recent pipeline deal. Technically, if the shares fall to under $2, I would strongly consider going long on GRH.
RadNet, Inc. (RDNT)
Easily one of the biggest winners in the ongoing U.S. equity bull market run, RadNet, Inc. , in business since 1985, provides outpatient diagnostic imaging services in the United States. As of April 9, 2014, it operated a network of 250 owned and/or operated outpatient imaging centers primarily in California, Maryland, Delaware, New Jersey, New York, and Rhode Island.
At one point RDNT had more than quadrupled in value since the beginning of the year — seemingly for good reason. In early May the company released its Q1 earningsresults. Despite the fact that RadNet’s revenue came in at $168.9 million for the period, weaker than the $173.5 million Wall Street analysts had projected, its EPS improvement and forward outlook curried favor with buyers in a big way.
During Q1, RadNet pared its loss to $0.03 per share, well ahead of the $0.06 loss per share Wall Street had expected. RadNet management also pointed out that bad weather on the East Coast affected its business, as 1% fewer MRIs, and 3% fewer PET/CT scans, were performed than were performed a year ago. Same-center procedures also showed a 1% year-over-year decrease in CT scan volume and a 1% decrease in overall procedure volume.
Perhaps most significantly, company management was bullish about its upcoming quarters, as it raised full-year EBITDA guidance by $2 million on both low and high ends to a range of $112 – $122 million. The company also boosted its free cash flow generation guidance by $4 million on low and high ends to a range of $34 – $44 million. Revenue guidance remained unchanged in a range of $700 – $730 million for the full year.
It appears that “smart money” began flowing into RDNT shares back in March when the stock first began its outsized move higher — cracking the $2 barrier and almost immediately “candling” up to $3. As is so often the case, buying in the issue attracted even more buyers — fueled in part by the unstoppable bull market.
As the chart indicates the bullish buying lost its momentum above the $7.50 mark in early June, and RDNT has been trending down in price for about a month since. As with GRH, the RDNT chart shows that there’s ample room for more share price depreciation as the market place consolidates the issue’s massive gains. That said, as long as the company can book the kind of growth it predicted in its May earnings report, it should only be a matter of time before RDNT shares once again head north.
Good luck with all of your trades!
Warren Gates, Senior Analyst, Normandy Research