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Thursday, November 8, 2012 - 05:00
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Thursday, November 8, 2012 - 05:00
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Thursday, November 8, 2012 - 05:00

Chart Shows This Undiscovered Small Cap is Ready for a Breakout

Thursday, November 8, 2012 - 5:00am

In the buildup to Hurricane Sandy, I was wondering if there could be significant impacts on shipping. In my research, I was surprised to learn that ports in the Great Lakes can also launch ships bound for Europe. There are even a few instances where ports in the Great Lakes are closer to European markets than ports along the East Coast or in the Gulf of Mexico. For example, ships leaving Detroit for Liverpool, England travel about 300 miles less than ships departing from Baltimore.

Shorter distances should allow shippers to save time and money, and a number of ships leave the Great Lakes filled with iron ore, coal and grains, because it is a less expensive option for producers.

One of the leading shipping companies that serves the Great Lakes region is a small-cap company that offers a great trading opportunity. Rand Logistics (Nasdaq: RLOG) operates 16 ships in this region, and the company notes that competitors face a number of financial, technical and legal hurdles to break into the business.

According to the company, it "operate[s] under the U.S. Jones Act, which reserves domestic waterborne commerce to vessels that are U.S. owned, built, and crewed; and the Canada Marine Act that requires only Canadian registered and crewed ships to operate between Canadian ports."

Potential new entrants need to find the capital to buy ships, find experienced crews and meet the rules set forth by each country.

Governments limit competition in the Great Lakes, but demand for ships is growing. Companies respond by awarding long-term contracts to shipping companies that are capable of meeting all of the requirements. RLOG reports that 95% of its business is covered by inflation-protected, long-term agreements, and all of its shipping capacity is booked through the end of the 2013 shipping season. These factors should deliver steady revenue to RLOG, and if the company can convert that revenue to profits, the stock should be attractive to value investors.

For now, RLOG looks like an undiscovered and undervalued trading opportunity. Earnings growth is expected to average 64% a year during the next five years, while the company has a current price-to-earnings (P/E) ratio of about 22.5. Earnings seem to have been held down in the past two years while the company made large investments in ships. The most recentacquisition was launched in May, and the company is using that ship to boost revenue now.

In the daily chart shown below, RLOG looks to have formed a possible rounding bottom and could move back toward resistance near $8, which would be a potential gain of about 22%. If the stock falls below $6, a decline of about 9%, it is likely that it will continue building a base for some time and the trade should be closed.

The weekly chart is ready to confirm the stochastics buy signal seen on the daily chart. The upcoming earnings release scheduled for Nov. 8 could be the catalyst for a quick move if value investors take notice.

Analysts that follow the company expect the share price to reach $11 in the next year, which would leave RLOG trading with a P/E ratio of about 22 based on forecasted earnings. Given the expected momentum in earnings, a higher P/E could easily be seen in the stock, and RLOG could move above that price target. If RLOG starts moving, it may be best to use atrailing stop rather than take profits based on a target.

Action to Take --> Buy RLOG at the market price. Set stop-loss at $6. Set initial price target at $8 for a potential 22% gain in 6-12 months.

This article originally appeared on TradingAuthority.com:

Chart Shows This Undiscovered Small Cap is Ready for a Breakout

Amber Hestla 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.