News Analysis date published New: 
Tuesday, February 26, 2013 - 06:00
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Tuesday, February 26, 2013 - 06:00
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Tuesday, February 26, 2013 - 06:00

Small Cap Offers 77% Potential Returns for Speculative Traders

Tuesday, February 26, 2013 6:00 AM

Whenever a company's president and chief executive office (CEO) abruptly resigns, it's a bit suspicious. When the top brass quits right before financial results are released, it's even more questionable. But, in the case of small-cap audio and video software company, Avid Technology (Nasdaq: AVID), the change in management may come as a welcome relief for shareholders -- and could help push up the stock at a critical point.

Since current CEO Gary Greenfield took the helm in December 2007, Avid shares have dramatically fallen. The stock tumbled more than 73%, from a December 2007 high of $28.98 a share to its current price, near $7.62. Under Greenfield's direction, the company prematurely sold-off some of its profitable consumer audio and video editing product brands, including M-Audio and Pinnacle. In the process, the company's workforce -- and brainpower -- shrank by about 20%.

Incoming CEO, Louis Hernandez, should help bring new perspective and leadership to the company. According to Avid board member George Billings, Mr. Hernandez is a "visionary, inspirational leader with a stellar track record of driving the operations and growth of technology companies in a variety of industries." While working as a lead director, he "spent years developing a deep familiarity with Avid's customers, markets, and products that will allow him to quickly make a positive impact as chief executive."

Shareholders have already reacted positively to the news. When the management change was announced on Monday, Feb. 11, the stock gained more than 5% in intraday trading.

As I'll explain below, Avid stock is currently at a key technical juncture. It's caught in a symmetrical triangle pattern, between support from the uptrend line and resistance from the downtrend line. Both trendlines are currently acting as barriers, preventing the stock from moving higher or lower. But, if soon-to-be-released earnings meet or exceeded estimates, then the stock could bullishly break to the upside on higher-than-normal volume, and a sharp rally would likely ensue.

From a technical perspective, the odds of a rally look favorable.

This Feb. 18 trading week, shares freshly tested the major downtrend line. If this trendline is decisively broken, it will be a very bullish technical breakthrough.

The downtrend line formed off the July 2011 $20.38 high. After the stock hit this high, it quickly plummeted to a low of $5.76 in November 2011, before regaining ground. The stock neared this low again in October 2012, forming a double-bottom. Because $5.76 was not breached, key support (marked by the dashed line) now holds at this level.

Upon hitting the October 2012 $5.76 low, shares slowly rose, forming a minor uptrend line. In early December 2012, the stock managed to bullishly break resistance, near $7.12, and this level acts as current support. At present, shares are sitting on the minor uptrend line and appear to be on the brink of bullishly breaking historical resistance near $8.06, a level that dates back to August 2011.

If shares can definitely break the major downtrend line and nearby overhead resistance at $8.06, then the symmetrical triangle pattern will be bullishly completed. As mentioned above, the triangle is marked by the intersection of the uptrend and downtrend lines, which are essentially capping the stock, preventing it from easily moving higher or lower. But, if the stock bullishly breaks to the upside, especially on higher-than-normal volume, a sharp rally should follow.

According to the measuring principle for a symmetrical triangle -- calculated by adding the height of the pattern to the breakout level -- shares could potentially hit $14.23 ($10.04-$5.85 = $4.19; $4.19+$10.04 = $14.23). At current levels, this target represents a whopping 87% return.

Since greater-than-average trading volume is a likely catalyst to push the stock higher, traders would be wise to stay attentive to this factor. An incident that would cause higher-than-normal trading volume is an earnings release, and it just so happens that the company is scheduled to report fourth-quarter and full-year 2012 results on Tuesday, Feb. 26, after the close.

While the numbers aren't overly cheery, they likely just need to be slightly above the Street's expectations to help move shares up.

Analysts project fourth-quarter 2012 revenue will decrease 21% to $145.9 million, from $185.3 million in the year-ago period. Full-year 2012 revenue is expected to fall 14% to $583.4 million, from $677.9 million last year.

The earnings picture is similar. Fourth-quarter earnings are estimated to fall 68% to 12 cents, from 38 cents per share in the comparable year-ago period. Full-year 2012 earnings are estimated to drop 212% to a loss of 29 cents a share, from 26 cents last year. However, by the first quarter of 2013, analysts expect earnings will be moving toward the positive side, reaching -3 cents, from -24 cents a share in the comparable year-ago quarter.

Risks to consider: This is a speculative, high-risk/high-reward trade. The company has a history of big earnings surprises, both positive and negative. When it reported fourth-quarter 2011 earnings, it blew estimates away, coming in 138% above expectations. If the company surprises again next week, then the stock could potentially yield double-digit profits in a short amount of time. However, negative news could just as easily send the stock barreling down.

I believe last year's positive earnings surprise bodes well, as does the fact that new management could help turn the company around in the near term. One way to reduce risk is to wait until the stock breaks above $8.06 resistance before taking a position. While the shift in management and better-than-expected results could send the stock soaring, shares are at a crucial technical juncture.

Action to Take --> Buy AVID if its breaks above $8.06 resistance. Set stop-loss at $7.02, slightly below current support. Set initial price target at $14.23 for a potential 77% gain in four months.

This article originally appeared on ProfitableTrading.com:
Small Cap Offers 77% Potential Returns for Speculative Traders

Note: I just finished reading a special report published by my colleague, Amber Hestla-Barnhart. The report details how to consistently and reliably pull income from the options market. It's thanks to Amber's one-of-a-kind training as a military intelligence analyst that allows her to see things others miss. It's something I think you should see. If you're interested, you can see the report for free when you click here.

Christine O'Malley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.