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After a stellar earnings report Thursday night, DragonWave (NASDAQ:DRWI) flew higher Friday and I thought I was going to be stuck with my position size unless I "chased". Chasing has been the way to go for much of this rally since March 2009; it is just not my favorite thing to do. Thankfully, today we have a pullback into the upper $12s on the stock, and the rare situation when a stock that smashes estimates doesn't run away from you appears to be in our hands. Potentially DragonWave could close that gap created by Friday's moon shot either right before 4 PM or first thing tomorrow morning (gap at $12.42)

As I type, the stock is $12.71 where I am going to add to my position; I will also place a larger limit order tonight just under $12.50 to see if I can snag it right at the "gap". After today's purchases, we will wiggle our way up from a 1%ish allocation to something closer to 1.75%. (thank you market gods) If I can get $12.50 or lower I'd like to get this name well over 3% - perhaps higher.

I also emailed investors relations since we had a question on how many shares outstanding would show for next quarter due to the recent share offering, the answer is just over 36M. (up from 34.1M last quarter) This makes me comfortable in believing they can make 90 cents on the full year. To repeat what we wrote Friday:

As for valuation, with 51 cents already in the bag for fiscal 2010, with 1 more quarter to go (which should be a >40 cent quarter) we should see DragonWave worst case hit 91-93 cents on the year. At $12, the multiple of this stock is a fraction of some retailers (picking a completely different sector) which are either shrinking or barely growing. Throwing a 20 multiple on year end 2010 (their fiscal year ends Feb 2010) gets us a $18 price. That's 50% appreciation from here. Is a 20 PE too high for the company? Hard to tell because the long term growth rate is unknown - obviously it won't be growing 400% a year like it has in the past 12 months. Feel free to throw a 16 multiple or whatever you wish and work backwards - it still appears cheap to me.


*please note, I am not sure if the full dilution is yet reflected from the recent share offering, so the analysis above assumes the shares outstanding will be 34.1M next quarter - it could be higher which would marginally reduce earnings per share. For example if they produce $41M in net income next quarter on the same 34.1M shares outstanding that equates to 41 cents in EPS; if instead there will be 37M shares outstanding that will mean only 38 cents. I have an email into the company to ask what the figure will be for Q4 fiscal 2010.

[Jan 8, 2010: DragonWave Smashes Estimates, Raises Guidance for 2010]

[Jan 7, 2010: Reuters: DragonWave Rally May Hold on Another UpBeat Quarter]

[Dec 22, 2009: Starting Stake in DragonWave]

original article

Long DragonWave in fund; no personal position

Source: Adding to Dragonwave on a Pullback