Potential Trades For The Week Of Jan. 30: Looking For Consolidation

by: Michael Kudrna

Referencing the weekly homework and stock radar, I am highlighting a few of the charts below for potential trades in undervalued stocks.

We finally saw signs of consolidation this morning, but it was short-lived creating continued frustration for the bears. The trend over the past few months has been that gap-ups tend to drift down towards the rest of the day and gap-downs tend to drift up the rest of the day. Today continued that trend as we drifted back towards even on the day.

I expect this type of action may continue for the week as market players re-position their portfolios after the FOMC decision/data last week. Bonds rose significantly and as I noted Sunday night, we are seeing a time that a large disconnect between bonds and equities can grow. The day these two correlate once again may be a very devastating day as the disconnect grows larger. You can expect it to be more of a whipsaw than a slow drift back towards being correlated, creating a great deal of pain for those not prepared. This will mean we need to stay disciplined and not overextend ourselves without ample cash reserves and proper exit strategies/stop losses. I don't expect to see this type of whipsaw for many weeks though, maybe even a few months away still.

Look for this type of consolidation action to continue for the week with more clarity after jobs data is released on Friday. This will be a very important jobs report that will determine if jobs are truly starting a new growing trend or if last month's data was a one-off report that we can't get behind. The other curve-ball to look out for is Europe/Greece. Many months ago, we were hopeful we'd stop focusing on every European headline in the markets and we finally received that disconnect in December. With Greek default chatter still continuing and concerning some, the point to remember is we are more prepared for this outcome than before. While negative news could provide some weakness, we should have plenty of support from dip-buyers anxious to join in. It is the unexpected news which we do not see coming that is most devastating. A Greek default is seemingly not that type of negative news.

I'm still focusing on charts that are showing overall strength with established trend-line support levels for favorable risk-reward buys. In a truly healthy market, I am more than willing to buy on breakouts expecting momentum traders to follow. In this market, I am finding that many breakouts are fizzling fast due to overall fearful sentiment and fast profit-takers. With that being said, I am more inclined to make moves near trend line support rather than breakouts.

Iridium Communications (NASDAQ:IRDM)

IRDM has a modest forward P/E of only 12 with an PEG Ratio of only .81. As of January 13, IRDM has a significant short ratio of over 25 which is about 19% of the float short. This means IRDM is a strong candidate for a short squeeze on further price appreciation. With $125 million in cash and $325 million in debt, it is a concern for some. However, looking at the balance sheet, most of the debt is considered long-term rather than short-term liabilities. It should also be noted that the Book-Value-Per-Share is $9.45, well above the current stock price. Lastly, the median price target for three analysts is $12 meaning we have plenty of room to rise to meet these analysts targets.

Annotated Chart and Trade Details:

(Click to enlarge)


DUSA has a forward P/E of only 12 with ample cash-to-debt of $24 million in cash to no debt. As of January 13, DUSA has a short ratio of over 10 which is over 4% of the float short. A 10-day cover is significant, but as volume increases, that will reduce very fast. One analyst has a price target of $6.50, which is 43% higher from the current stock price.

Annotated Chart and Trade Details:

(Click to enlarge)

The Medicines Company (NASDAQ:MDCO)

MDCO has a forward P/E of 17, which is higher than its current P/E of under 7. As of January 13, MDCO has minimal shorts with only a ratio of 4.6. One large benefit for MDCO is the significant cash of $307 million to no debt, providing much flexibility for the organization. Lastly, the median price target for six analysts is $22.25 with a high target of $27.

Annotated Chart and Trade Details:

(Click to enlarge)


I have no positions in any stocks mentioned, but may initiate a long position in DUSA-OLD, MDCO, IRDM over the next 72 hours.