Little-Known Small-Cap Survivor Could Make Traders 25%
Whenever we have an extended market crash, it is a good idea to look for the survivors. These are the companies that have endured the brutal years of a bear market and are still around to participate in the recovery. Survivors probably have good management and strong balance sheets that helped them weather the storm, and those assets should shine in a new bull market.
In the past few years, real estate has suffered one of its deepest and longest bear markets. Now there are finally signs of a recovery in both residential and commercial real estate, and it makes sense to look at the survivors. Small-cap stocks in this sector should be especially attractive since they survived despite lacking access to large lines of credit. Management and asset quality should both be high if a small-cap real estate operating company has survived the worst five years in the history of real estate.
One survivor worth buying now is Griffin Land & Nurseries (Nasdaq: GRIF). This company is listed under the consumer goods sector because it has a tree nursery and landscaping operation. In addition to this business, the company owns and operates 2.2 million square feet of commercial space and is developing two residential communities with land available for more than 700 homes.
This is a market that looks like it is in the early stages of recovery and Griffin Land & Nurseries can benefit. Real estate website Truila.com shows that the number of sales in the company's sales-ready development in Windsor, Conn., has increased 24% in the past year while prices have been flat.
The company is carrying its real estate at market value and has taken large write-offs to reflect the declines in the market. If real estate actually does recover, Griffin Land & Nurseries will enjoy significant income gains from reversing those charges.
The stock price of Griffin Land & Nurseries is still below its 2008 highs. Prices have been forming an extended bottoming pattern since 2009, and the recent price action puts Griffin Land & Nurseries above resistance that has stopped advances since 2009.
During the past three years, Griffin Land & Nurseries has traded in a range between $24 and $33. Some traders might call it a double-bottom on the monthly chart or a multiple bottom on the weekly chart. Regardless, the range is well defined, and in recent days, the stock has broken above the upper end of that range, a sign that a breakout may be taking place.
Traders generally expect a breakout to follow-through with a price move at least equal in size to the depth of the range. That $9 trading range allows us to project a price target of $42 ($9 added to the breakout at $33) for a potential gain of about 25%.
Momentum indicators like MACD support the price breakout, and the company is expected to report earnings on Oct.15, which could bring the stock to the attention of investors. The pending earnings report is a reason to consider buying Griffin Land & Nurseries now.
Like many small-cap stocks, Griffin Land & Nurseries is thinly traded. The average daily trading volume on the stock during the past three months has been about 2,100 shares a day, and the spread between the bid and ask price is fairly large. If you trade Griffin Land & Nurseries, consider using limit orders to enter and exit the trade.
One strategy many traders use is to submit a limit order priced at the midpoint between the bid and ask prices. Limit orders submitted within the spread like this are often filled and traders get much better prices than they would with market orders.
A close below $29.50 pushes Griffin Land & Nurseries back into the lower end of its trading range and would be a good stop level. However, you should not enter a standing stop order on thinly traded stocks because there is a very good chance that the order will be filled quickly and leave you with a loss. This fill would be the result of a computer seeing your order and filling it rather than a sustained price move in the stock. Instead of entering a stop ahead of time, after a close below the stop price, use a limit order to exit the next day.
Action to Take --> Buy Griffin Land & Nurseries at a limit price of $33.60. Exit with a loss on a close below $29.50. Set initial price target at $42, offering a potential gain of 25% in 6-12 months.
This article originally appeared on TradingAuthority.com:
StreetAuthority LLC does not hold positions in any securities mentioned in this article.