I love finding little stocks that have a strong possibility of doubling or even tripling in a short period of time.
I uncover them by running technical screens on stocks trading under $10. My screens search for companies that have been knocked off their highs then built technical support and rebounded above their 50-day simple moving averages.
Once the screen has found suitable candidates, I drill down into fundamentals, economic conditions and potential catalysts that could power the little stock higher. Many beaten-down stocks experience a rebound from their lows, only to drop back down to those lows or even further -- the so-called dead cat bounce. My fundamental, economic and catalyst screen, which I call Price Drivers, adds support to the technical picture.
I firmly believe that technical analysis plays a powerful role in stock analysis, but it cannot stand on its own as a decision-making tool. Traders need to understand what's behind the price moves to make profitable decisions. Price alone isn't adequate for the vast majority of situations.
The latest stock to pass my technical and fundamental Price Drivers screens is Brazilian telecommunications company Oi (NYSE: OIBR), which trades on the New York Stock Exchange as an American depository receipt (ADR).
My initial technical screen looked at the weekly chart of OIBR:
As you can see, a double bottom formed between the start of July and the end of August. OIBR has since bounced, hitting resistance around the $2.04 level.
Digging deeper into the technical picture, we move on to the daily chart:
OIBR is trading above its 50-day simple moving average at $1.71 but is still solidly below major technical resistance at the 200-day simple moving average at $2.40. The technical pattern of this stock is perfect for a potential entry on a breakout close.
Now let's take a closer look at the economic environment and fundamental picture of the company.
Oi operates both landlines and cellular services for residential customers, companies and governmental agencies in Brazil. It also operates an Internet portal and public telephones, as well as related services. Founded in 1963 and headquartered in Rio de Janeiro, Oi boasts a market cap of $3.4 billion and an enterprise value of $18.8 billion.
By the looks of its second-quarter numbers, things are improving for the company. Net revenue was up by 2.4% year over year, and analysts expect 2.8% revenue growth for the full year. The company said it added 2.4 million customers in the second quarter, bringing its total customer base to almost 75 million.
Most interesting, there is a pending merger with Portugal Telecom. However, it's important to note that the details still appear to be up in the air. Unsubstantiated rumors allege that Portugal Telecom retains the right to call off the transaction at any time. The merger, should it occur, should lift the share price of OIBR. If not, there may be another suitor down the road.
Finally, the economic environment is ripe for this company to grow. In 2012, Brazil's National Telecommunications Agency reported there were 116 mobile phones for every 100 citizens, but the use of smartphones remains relatively low. This is changing rapidly with the agency projecting that at least half of Brazil's 200 million residents will have a cellular phone with Internet access by 2015.
Even uber-investor George Soros sees the potential in Brazil's telecommunication business. He, along with partners, is planning on investing $218 million in a startup telecommunication company in the country. I love OIBR on a breakout close above $2.11.
Action to Take -->
-- Buy OIBR on a daily close above $2.11
-- Set stop-loss at $1.69
-- Set initial price target at $4.25 for a potential 101% gain in three months