DivX May Be About To Break Out

From Google Finance:

DivX Inc. (DivX) creates products and services designed to improve the experience of media. The Company's product offerings include a video compression-decompression software library (codec) and other consumer software, including the DivX Player application. It also licenses its technologies to consumer hardware device manufacturers and certifies their products to ensure the interoperable support of DivX-encoded content. DivX's customers include major consumer video hardware original equipment manufacturers [OEMs], including Koninklijke Philips Electronics (Philips) and Samsung Electronics. In addition to technology licensing to consumer hardware device manufacturers, the Company generates revenue from software licensing, advertising and content distribution. In March 2006, DivX acquired all of the assets of Corporate Green, a general partnership that developed an online community platform.

FUNDAMENTALS: Aided by the booming popularity of online video, DIVX had a break out year in 2005 which saw the company swing to its first full year profit in company history. 2006 was even better, with earnings increasing 600% over '05. One key characteristic that I look for in top stocks is rising margins and return on equity. Net margins (at 28%) are outstanding and rising quickly. Return on equity isn't exceptional, but very good at around 14%.

TECHNICAL: This is a stock that still needs to prove itself to a certain degree. It's just now making a move up in the right side of its first base since going public in September of last year. With sell volume drying up at the bottom and a big gap up above resistance of the 50 day moving average following preliminary earnings guidance above previous estimates, I believe the stock won't have any trouble breaking out and testing its all time high around 32 over the next few months. A strong break out above the peak of a double bottom base at 24.21 and I will consider a position.

Full Disclosure: Author has no position in DIVX.

DIVX 6-month chart