Two Breakout Smallcaps to Watch (AERTA, IFO)

Includes: AERTA, IFO, JCOM
by: Tate Dwinnell

It's no surprise that as goes the market, so goes the success of breakout growth stocks. Needless to say, it's been a rough go over the past month. I haven't seen this kind of anemic performance since I put my tracking database together about 2 years ago.

In the past 2 weeks there was just one breakout of a highly ranked stock (ranked 50/60 or above combined technical and fundamental score) in Advanced Environmental Recycling Technologies (AERTA), which is currently up 15% since the breakout.

While the base is a bit steep (which is more common in lower priced stocks) the volume and price action in AERTA reveal that there is a ton of demand for this one. I've mentioned in several previous posts over the past couple years that stocks often provide a few buying opportunities on the way up. The first opportunity in this one was provided on May 3rd after it broke out from the first pivot at 2.40.

I began covering this stock at the morning of the second breakout at 2.64 on May 18th when it was added to the database. It's currently overextended but may provide a decent opportunity on a pull back to the 20 day moving average.

Advanced Environmental Recycling Technologies (AERTA) develops, manufactures, and markets composite building materials that are used in place of traditional wood or plastic products for exterior applications in building and remodeling homes and for certain other industrial or commercial building purposes. The company appears to be hitting its stride after a record year in '05 while being named Lowe's Vendor of the Year. Consistency could be better but this is certainly a company to keep a close eye on (click to enlarge):

In the month of May, there were just 7 breakouts in the database (that includes AERTA), with Infosonics (NYSE:IFO) and J2 Global Communications (NASDAQ:JCOM) being the only other highly ranked breakouts in the month (both rank 50/60). IFO has risen an astonishing 89% from the first breakout point at 14.

Again, Infosonics is a stock that has provided two breakout points but I would not have entered a trade at either point. Technically, the first breakout occurred on May 8th at 14, but I would not have purchased here because the company was reporting earnings the following morning (I rarely hold a small growth stock through earnings). I was looking for an entry the following morning, but the stock gapped up and never provided a low risk entry. Considering the market looked tired at that point, it was too much risk to take on.

Of course in hindsight I wish I had pulled the trigger, but you have to stay disciplined. The stock provided a second entry on a break to all time highs, but again, the risk vs reward doesn't look favorable up here. With poor market conditions and a doubling of the stock in just weeks, it's due for a fall.

InfoSonics (IFO) is a distributor of wireless handsets and accessories in the United States and Latin America and it's a company that continues to grow rapidly. Earnings per share over the past 3 years have increased from .08 share in '02 to .38/share in '05. 2006 is expected to be another record year with expectations for .66/share.