Breakout Predicts This Stock Is Headed For A Double-Digit Rally

One of my favorite times to trade a stock is just as it’s breaking out of a base. If there is a clear, definable stop-loss nearby, so much the better since my risk is limited. 

And when the fundamentals support the bullish technicals, the probability that I have found a successful trade is high.

Enter Steelcase (NYSE: SCS), a Michigan-based manufacturer that was founded in 1912. Its first patent was granted in 1914 for a steel, fireproof wastebasket, revolutionary for its time.

#-ad_banner-#At first glance, the company looks like a maker of conventional office furniture and related products. It makes ergonomic chairs, tables, bookcases and cabinets. It also provides LED desk lamps and presentation technology such as interactive whiteboards that fuse analog and digital content. Its products are delivered through a network of independent dealers with 650 locations around the world.

What differentiates Steelcase from its competition, however, is its emphasis on partnering with academic research institutions to find out how individuals “really work.”  

Management believes workplace satisfaction is highly correlated with employee engagement and, thus, productivity. They view their office products not just as “furniture,” but as an attempt to create an environment in which individuals are motivated to contribute.

This research emphasis on building environments that enhance employee satisfaction recently earned the company a nod from Fortune magazine. The publication named Steelcase one of the world’s most admired companies. In addition to the quality of its products and services, innovation was cited as a key reason for the company’s selection.

Recently, Steelcase’s financial results have been static. In the first nine months of its fiscal 2015 year, ended in February, revenue grew 4.5% year over year, but diluted earnings per share of $0.50 were flat from the same period a year ago.

The office furniture industry, however, is very cyclical. Some of the factors that influence it are overall corporate profitability, new office construction, the level of white-collar employment and office vacancy rates.

With the improving U.S. economy, several of these factors — in particular the net absorption of U.S. office space and the office vacancy rate — are about to trend strongly in the company’s favor. More rented office space equates to increased demand for the company’s products.

When the company reports full-year fiscal 2015 results next week, analysts expect to see 3% sales growth to $3.1 billion and an 8.5% jump in earnings to $0.89 per share. For fiscal 2016, they anticipate an increase in revenues of just under 5% to $3.2 billion, but per-share profits are expected to soar 28% to $1.14.

If these estimates prove accurate, this should provide a tailwind for the stock over the coming quarters. 

As I mentioned, the technical picture is very positive and what initially drew me to SCS. The four-year chart below shows shares bottoming under $5 in September 2011. Since that time, they have gained nearly 300%, hitting a multiyear high of $19.35 on Thursday.

The uptrend that began in 2011 continued for about two years. The stock stalled in October 2013. It hit the mid-$16 level three times, failing and retreating.

The downtrend, however, was both shallow and short-lived. Shares pulled back to just above $13 in February 2014, where the current uptrend began.

In analyzing the chart, take note of the significance of the $16 level. As mentioned, SCS broke its initial uptrend line after this level was tested unsuccessfully several times. Then, when shares broke above $16 in June, they quickly reversed and returned to the February 2014 uptrend line. Finally, after running to a high above $18 in late December, SCS once again retreated to support at $16 in the new year. 

There are two technical features that help us set a stop-loss. The first is the February 2014 trendline, which currently intersects the chart just under $16 at about $15.90. The second is strong lateral support near $16.

After consolidating between $16 and $19 in a small, rectangle-like formation for about six months, SCS broke out this week.

Using a consolidation low of $16.38, the close from Jan. 21, and the peak prior to the most recent breakout of $18.77, we get a minimum target for this new breakout of $21.16 ($18.77-$16.38 = $2.39; $2.39+$18.77 = $21.16).   

Analysts have a median target of $21 and a high target of $23. I am going to take the middle road and set an objective of $22.49. From current levels, that would provide traders with a return of more than 16%. 

Recommended Trade Setup:

— Buy SCS at the market price
— Set stop-loss at $15.89 
— Set price target at $22.49 for a potential 16% gain in six months

Note: In addition to a chart breakout, there is another signal that often indicates a stock is ready to make a huge move. In fact, after it happened, we’ve seen stocks rally 20% in two weeks… 118% in three months… even 266% in 12 months. And this signal was just given for 10 new stocks. You can get their names here.

This article was originally published on Breakout Predicts This Stock is Headed for a Double-Digit Rally