This Stock Could be Setting Up for a Breakout to Multi-Year Highs
If you have young children, you may be familiar with the educational toy company, LeapFrog Enterprises (NYSE: LF). The small-cap, California-based firm designs and develops technology-based learning tools to help kids tackle reading and writing.
As the mother of 17-month old little boy, I'd have to say his LeapFrog toys are my favorite of the bunch. They're robust, interactive and educational. But, best of all, they're fun -- even for me.
LeapFrog's flagship educational product is the LeapPad2. This is an interactive tablet, like the Apple (Nasdaq: AAPL) iPad, but designed specifically for kids, aged 3 to 9. It retails for around $100. It lets kids play fun, educational games, run apps and even take pictures.
In the United Kingdom, the LeapPad2 was the hottest selling toy in December. Although it hasn't quite caught on as much in North America, it's still very popular. In fact, during the holidays, retailers, like Toys "R" Us and Amazon.com (Nasdaq: AMZN) only allowed customers to purchase two LeapPads at a time to keep up inventory supply, due to such strong demand. And, with exciting, new products expected to be released in April 2013, the outlook for LeapFrog looks promising.
From a technical perspective, LeapFrog stock appears to be on the verge of a bullish breakout.
Surging from a low of $2.57 in August 2011, the stock formed a major uptrend line, hitting a multi-year high of $12.28 in late July 2012. However, unable to sustain this momentum, shares began to fall in August.
Leapfrog stock quickly dipped, tumbling first to around $8, and then slipping further until finally finding support around $7 by November. In the process, the major uptrend line was bearishly broken and a minor downtrend line formed.
However, this December, on news of strong holiday sales, LeapFrog stock jumped off $7 support and has been climbing ever since. Shares currently appear to be on the verge of bullishly breaking the minor downtrend line. Additionally, they're on the cusp of bullishly breaking through resistance around $9.45.
If $9.45 resistance can be broken, Leapfrog could easily climb back to its multi-year high of $12.28, presenting traders with 30% potential gains.
The bullish technical outlook is supported by solid fundamentals. Due to strong holiday sales of the LeapPad 2, analysts project full-year 2012 revenue will increase 22% to $557.8 million, compared with $455.1 million in 2011. For the first-quarter of 2013, analysts expect continued demand for the LeapPad2 will cause revenue to notch up 4.4%, to $75.2 million, from $72 million in the comparable year-ago period.
The earnings outlook is similarly upbeat. The company has beat earnings expectations for the past seven consecutive quarters. Analysts project strong product sales will push full-year 2012 earnings up 177%, to 83 cents per share, from 30 cents per share last year.
In the first-quarter of 2013, earnings are expected to be two cents a share better than last year at -12 cents, up from -14 cents in the comparable year-ago quarter. Weakness following the holiday shopping season is to be expected, and earnings will likely rebound again with the company releasing new products in April.
In addition, LeapFrog has a strong balance sheet with $49 million in cash and no long-term debt. This liquidity should give the company the financial freedom to continuing researching and developing exciting new educational learning toys for children.
Risks to consider: LeapFrog has a track record of continually wowing customers with new devices. To stay competitive with the bigger toy companies, like Hasboro (Nasdaq: HAS) and Mattel (Nasdaq: MAT), this small-cap stock will need to continue innovating, or could face the possibility of a takeover from one of these larger firms. However, LeapFrog is in a cash-rich position and has the funds to hire top creative minds that may help develop the world's next best educational toys.
Action to Take --> Buy Leapfrog on a break above $9.45 resistance. Set stop-loss at $6.97, slightly below current support. Set initial price target at $12.28 for a potential 30% gain by mid-2013.
This article originally appeared on ProfitableTrading.com:
Under $10 Stock Setting Up for a Breakout to Multi-Year Highs
StreetAuthority LLC does not hold positions in any securities mentioned in this article.