Stock #3 RDCM - Radcom - 1-year gain = 570% (1/10/11)

Stock #3 RDCM – Radcom Ltd.
Internet – Network Solutions






I’m changing up the format a little here…putting the summary at the beginning and letting the detail oriented folks scroll down for the details. Anyway, next stock on our list is RDCM, which snow-balled to a 570% gain in a year as of 1/10/11.

Why did RDCM go up 200% plus in a year?

1. For this stock, it appears earnings growth and sales growth mattered. The company went from losing money to making money and coupled that with strong triple digit earnings growth and 50%+ sales growth each quarter.

2. Yet another stock with severe neglect prior to the large move, both technically, fundamentally, and institutionally. Even now after the move, the stock is still very low volume and low liquidity and has no analyst coverage or fund ownership. Each stock studied so far has this neglect quality before the move starts.

3. The main initial catalyst that started the move appears to be the signing of a contract with a China customer in March 2010 when the stock was at $2…after that the volume started to pick up (though still low liquidity) and the stock went up 500%+ from there. Since this company’s annual sales were at the $10M area at the time, new contracts can make a large % difference in sales, even if it is just a news release with the word “China” in it. The company also signed contracts in France and other countries during the year. However it was not clear what the dollar effect on sales or earnings was, which had me suspicious that this was a press release company that just releases news every time they sign a contract even if it isn’t material.

4. This stock is was not only low-priced, but very low float and low liquidity. So moves tend to be volatile. When a company like that gets explosive earnings and sales growth coupled with neglect it can make big moves. The latter part of the move, where the stock doubled in 5 weeks, appears to be pure momentum at its finest, with 2 breakouts after 4-10 day weakness in middle of that move. Even now, the stock remains low liquidity and very low average volume. This momentum move was tradable with a wide stop once the price crossed $6, but the low liquidity may have been an issue.

5. Sector appears to have had some effect on the trend. But a lot of the moves on the stock coincide with new contracts and sales growth, not sector news. Although overall technology strength may have contributed to part of the move, the large moves appear to be more stock specific.

Honestly the general up move on the stock appears to be driven mostly by the prior neglect combined with super-low liquidity/float and explosive earnings/sales growth. However, the micro-liquidity and low float appears to have accounted for the extent of the move and the character of the rallies and pullbacks, but the direction of the move was driven by other catalysts. The stock did not appear to be tradable in large positions until maybe the August - September 2010 rally.

As usual, feel free to alert me of any errors or oversights.

Now for the details and notes:

RDCM started its decline in 2006 at a split-adjusted $20, and fell to under $1 by late 2008. Similar to other stocks studied so far, this stock bottomed under $1 in late 2008 and early 2009. The stock then broke out of a 2.5 month base to begin the uptrend in the September 2009 at around $1. After going sideways for about 5 weeks, the stock broke out again in October 2009 just ahead of earnings, and more than doubled from $1.17 to $2.80 in 3 days. The stock then went sideways for about 4 months heading into February 2010 at a price of about $2.

The stock announced on 2/2/2010 that it had achieved profitability and positive cash flow for the December 2009 quarter, but the stock had already rallied into earnings and after a rally on earnings day the stock went sideways for about 6 weeks in the $2 range on very low volume. So in March 2010 the stock was sitting at $2, and still had very low average volume, fewer than 100k shares daily.

On 3/24/2010, the stock broke out of the base being built since October 2009 on a huge spike in volume (1M shares vs. < 100k average), moving from $2.15 to $3.46 (60%) on that single day. The catalyst was the first network monitoring contract signed with a Chinese mobile service provider. However, the rally was too much too fast and the stock consolidated for about 3 weeks on falling volume, during which it retraced half of the 60% rally. The pullback was fairly loose and not a tight range and contained a couple of gaps within the range.

On 4/16/2010 the stock broke out of the 3 week base and rallied for 2 days from $3.33 to $5.88, a gain of 76% in a two day burst. Once again the rally was too much too fast, and the stock retraced the entire rally, bounced, and formed an upward drifting base into late July 2010.

On 8/2/2010 the stock broke out of the upward drifting 3-month base on higher volume (thought not huge volume), breaking through the high of the base around $6. The stock made a two-day move of 27%, went sideways for about 8-9 days, then broke out again on above average volume at around $7. The stock had one more pullback of 4 days and then went parabolic, closing at $12.50 on 9/9/2010. That capped a move of 124% in a matter of 6 weeks. By this time the stock had moved from about $2 to $12 in a little less than 6 months, a 600% move.

As may be expected from a stock that makes that kind of move, the stock had a huge volume reversal day on 9/10/2010 and went into a range between $9 and $12 until January 2011. The stock has now raced back to the September 2010 highs for a test.

Other notes:

- The breakouts early on were not really very clean on this stock, with pullbacks that were loose and had wide % swings. Many of the breakouts had below a $1M dollar volume with the exception of the largest ones. The stock really took off once it passed $5-$6 area.

- Bases were long (few weeks to months) and rallies were in short bursts until the stock crossed the $5-$6 area. Once it got past that range it doubled pretty quickly, in about 5 weeks. At that time it was extended.

- Before the big move in 2010, the stock had declined for about 2 years to 2008 and bottomed for another year into 2009.

- Earnings growth/sales growth last 4 quarters starting Dec 2009:
o Dec 2009: 108/61 (first acceleration on eps and sales, first profitable qtr)
o March 2010: 119/120
o June 2010: 156/75
o Sept 2010: 275/54

- Sector relative strength: IBD Sector rating now is 91. Other stocks that did well in the sector, which you probably recognize, include winners like VHC, FFIV, WWWW, ARUN, and RAX. RDCM does network testing and monitoring.

- Currently P/E is at 54 but was negative at before the move. Price to book is 24 and debt was 0.16. Margins, ROE, and ROA all have been historically negative. Not great fundamentals.

- There is no fund ownership. No earnings estimates. It is neglected from an institutional and analyst coverage standpoint.

- Float is 3 million.

- The stock was IPO in 1997.

- IBD ratings are currently 97 Comp, 80 EPS, and 99 RS.

- Short Interest has been at about 5% last 2 months.

- There has been no notable insider buying or selling activity.

- The stock’s trend intensity was at the following levels throughout the move:
o Feb 2010 (in base): 108
o March 2010 (on breakout): 117
o June 2010 (in base): 102
o August 2010 (on breakout): 122
o Sept 2010 (at intermediate top): 163