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ARCW: Zeroing In On Tomorrow's Big Winner

09/08/14 04:48:43 PM
by Billy Williams

Questioning some of your basic trading assumptions can help you hone in on opportunities that you would otherwise miss, such as this potential big winner.

Security:   ARCW
Position:   Buy

When trading, your assumptions can often keep you blind to new opportunities in the market. That is because assumptions stem from your own beliefs about the market and how to trade it according to your goals and preferences. One of the assumptions is that trading higher-priced stocks with larger market caps tend to attract the bigger institutional traders. This can cause the share value to rise but, by taking a closer look, you may realize that that is not always the case. In fact, by moving this assumption around, one stock has the potential to turn into tomorrow's big winner.

First, I'll dig into the assumption that trading opportunities in stocks trading over $15 a share, stocks with larger market caps, and those that attract institutional sponsorship are better trading candidates. While it's true that some stocks won't come up on the radar of multi-billion dollar pension funds, that's only because they don't match the criteria of that particular fund. Also, when pension funds and institutional traders want to invest in a stock, they need to invest tens of millions if not billions of capital so they need to buy into a stock with a large enough market cap to support such an investment. However, when a stock rises to a particular price point and reaches a certain market cap, then that gets the big player's attention and they begin to deploy their capital.

Figure 1. Last year, ARCW was trading under $2 a share and looked like a dead-end as a trading opportunity. But, the stock took off and gained almost 900% in three months. This price surge signaled that the stock was on the rise and could be a potential big winner.
Graphic provided by:
How can you identify a stock before it comes up on the radar of the bigger players on Wall Street and get in front of them as they begin to buy up shares and push up share value? Historically, the biggest winners on Wall Street started as small-cap stocks with a market cap under $2 billion whose shares were trading under $15 a share. Once that company's earnings began to accelerate, investors would buy up shares and push the price up. At times, price would react explosively and the stock's price action would signal that it was time to take a position.

The potential for catching a stock early just before it runs away from the rest of the stock market is huge. But, so is the risk.

Figure 2. The stock seemed to stall but was really forming a base pattern as daily average volume continued to rise. In late August 2014, ARCW broke above $19 and looks to be going on a bull run.
Graphic provided by:
You want to focus on small-cap stocks with shares trading below $15 that are experiencing accelerated earnings. If these factors are in place, then you should wait for the stock's price action to confirm that a bull rally is triggered.

ARC Group Worldwide, Inc. (ARCW) manufactures and sells precision components, flanges, fittings, and wireless equipment in North America and Europe. ARCW had been in the trenches within its industry for over 10 years but has languished in previous years until recently. Last year, in mid-August, ARCW traded just under $2 a share before taking off and trading as high as $17.49 a share in three months (Figure 1). But, even though the stock gained a return of almost 900%, it wouldn't have been a good time to enter a long position.

That is because the stock's 50-day average volume was anemic. It was not enough to sustain an upward move and neither did it indicate institutional sponsorship, at the time. But, if it could hold on to its gains and volume continue to rise, then a break above $19 would indicate a solid entry signal.

Nine months later, at the end of August, 2014, ARCW issued that signal (Figure 2). Volume continued to rise revealing that the stock is being accumulated and this is at the tail-end of a 55% increase in quarter-to-quarter earnings reported.

The stock is slowly being bought up by the larger players on Wall Street and a buy entry on the next pullback would be a solid play. I would still advise caution and to accumulate the stock gradually as the price rises.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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