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Begin Part 2 of 3
SUBSCRIBER QUESTIONS/COMMENTS
Q: I have just started following Brightpoint (CELL). The chart looks Impressive over the past 6 months. However, I notice that this stock went through a 1 for 7 reverse stock split when it was trading at less than 40 cents. Should this have any effect on the decision I make to invest in this company? I have experienced that rarely do reverse stock splits work, and over time the stock usually goes back to the same level it was trading at prior to the reverse stock split. It appears that Brightpoint is an exception to this rule. But after a reverse stock split, aren't there fewer shares outstanding, meaning higher volatility for the available shares?
A: Reverse splits have become much more common in the bear market as stocks fight to stay listed on the exchanges. In most cases that is a fight for survival; if a company is delisted it falls from the spotlight and loses its major source of capital. In 2002 there were 104 reverse splits, many of those in technology stocks. Nasdaq is loosening the listing rules as so many are trading so low, but it is still critical to keep listed so stocks can hopefully again attract that institutional money that can drive them higher.
Again, for most it is short term survival as the goal. The prices are low because earnings expectations are low. If they cannot turn that around or if there is no hope of turning earnings up, the price will sink right back down. Some people short stocks that do splits as the majority fall right back down as their future prospects have not changed.
There are some that have made a change. MSTR did that when it effected its reverse split in July. That came with other timely news as to growth in earnings and future prospects. CELL has been able to do the same thing, turning the split along with improving news to a sharply increased stock price. Both of these made their moves AFTER the split was effective. While it reduced the number of outstanding shares to 8 million and thus could impact the volatility, CELL trades 125,000 shares daily, enough to attract institutions and avoid a lot of wild swings based on the lack of liquidity.
Thus, a reverse split often is a red flag that something is wrong with a stock. The split won't reverse declining earnings, but if it comes in conjunction with positive news such as an increase in guidance it can propel the stock higher. It goes back to the same idea that drives stock prices: anticipation of rising earnings drives the stock price. This is a timely question and it is covered in an upcoming Bottom Line Personal where Jon Johnson provides some expertise regarding reverse stock splits.
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THE PLAYS:
Good moves: VRTY; ZMH
New:
Upside:
Play Date: 02/25/2003
IDCC (Interdigital Communications--$14.22; +0.09; optionable): Wireless communications
http://biz.yahoo.com/p/i/idcc.html
STATUS: Testing the 50 day MVA. IDCC rallied nicely off the August low to the November high (19.50) and then started forming the current 2.5 month base. It is still forming the base, rallying off the 200 day MVA (11.65) to start the month, and now moving laterally the last 5 sessions after breaking over the 50 day MVA (13.78). Volume has moved back to below average during the lateral move as you want to see on a consolidation of a move over resistance. During the base accumulation is positive at 2 up weeks on rising volume to 0 down weeks on rising volume; that is very good given the stock is just coming off the bottom of the base as the strongest accumulation occurs when a stock moves back up. Money flow is also strong, moving up as the price moves laterally.
Volume: 354.254K Avg Volume: 574.954K
BUY POINT: $14.62 Volume=850K Target=$17.94 Stop=$13.58
POSITION: DAQ IV - Sept. $12.50c (73 delta) and/or Stock
http://www.investmenthouse.com/ci/idcc.html
Play Date: 02/25/2003
NXTL (Nextel--$13.95; +0.57; optionable): Wireless communications
http://biz.yahoo.com/p/n/nxtl.html
STATUS: Flat base. Another wireless stock, but we believe in looking at stocks in good patterns and the hotter sectors. Wireless stocks have formed up well, basing out after being one of the leading groups off of the July low. They did not sell off with the rest of the market, but held their ground. NXTL is a classic example. We caught it on the breakout from its ascending wedge in October, and now we are looking at catching it on this next base. Accumulation in the base is solid at 2 up weeks on rising volume to 0 down weeks on rising volume. Good looking base.
Volume: 24.272M Avg Volume: 16.597M
BUY POINT: $14.28 Volume=2.5M Target=$17.12 Stop=$12.88
POSITION: FQC HR - Aug. $12.50c (69 delta)
http://www.investmenthouse.com/ci/nxtl.html
Downside:
Play Date: 02/25/2003
CSC (Computer Sciences--$31.21; +0.36; optionable): Computer software ITS
http://biz.yahoo.com/p/c/csc.html
STATUS: Put. Moving in a downtrend since March 2002, CSC tanked in September and October and rallied up to the trendline in early January. Since then it has turned back in the downtrend. It tested the 50 day MVA in early February and has since started back down the short term MVA. Tuesday it tapped at 30 on the low (it hit there in early February and 8 sessions back) and rebounded. Volume on the bounce was lower, however, after stronger volume selling Monday. It looks as if it is going to test the 18 day MVA (31.73) to 32, and then turn lower again. A move down from there is where we pick it up.
Volume: 965.9K Avg Volume: 1.224M
BUY POINT: $31.38 Volume=1.8M Target=$27.15 Stop=$32.65
POSITION: CSC PG - Apr. $35p (-78 delta, low OI)
http://www.investmenthouse.com/ci/csc.html
Revisited:
Play Date: 02/13/2003
AVCT (Avocent--$27.49; +0.39; optionable): Computer peripherals
http://biz.yahoo.com/p/a/avct.html
STATUS: Testing the breakout. Still moving laterally the past three weeks, holding over the 18 day MVA (26.40) on the intraday lows as it builds for the next stronger leg up. Volume the past two sessions has moved up above average and is looking for a breakout. Strong accumulation and solid money flow helping pave the way.
Volume: 650.995K Avg Volume: 469.909K
BUY POINT: $27.65 Volume=725K Target=$30.45 Stop=$25.71
POSITION: QVX HE - Aug. $25c (63 delta) and/or Stock
http://www.investmenthouse.com/ci/avct.html
End part 2 of 3
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