When looking at a stock’s chart, every investor would love to know the exact price at which to buy and the exact price at which to sell. Nobody actually does, but there are always certain trends and patterns that can indicate when a stock could be poised for big growth. One of these indicators is known as the falling wedge.
The falling wedge (shown below) is a generally bullish pattern that usually signals to investors that an upward breakout is on the horizon. Two trend lines characterize the downward wedge: support and resistance. The support line is the lower line on the chart while the resistance is the upper line. Both slope down from left to right, but the resistance line has a steeper slope so the two lines are converging.
Generally speaking, when the two lines are close their intersecting point, the stock is more likely to breakout of its pattern sooner rather than later. While that breakout can just as easily be downward, the downward wedge more typically precedes a positive breakout.
We’ve highlighted six stocks that have displayed a strong falling wedge and could therefore be on the verge of breaking out in the positive.
Methodology
To find the best stocks poised for growth, we looked for:
1) Small-Cap Stocks
Generally, stocks that have a market cap under $2 billion are the ones that exhibit the most potential for growth due to their smaller size. Larger stocks fall prey to the law of diminishing returns, rarely showing the sort of explosive growth possible in smaller, growing companies.
2) P/E Ratio Under 15
A Price to Earnings Ratio of fewer than 15 indicates that investors are getting a better price for the stock compared to its earnings. A high P/E can mean that the stock is overvalued by the market based on its earnings, something that can cap its potential growth.
3) A Strong Falling Wedge Pattern
The final and most important metric we used is the strong falling wedge pattern. This way, we could limit the search to companies that have been displaying downward trends with converging support and resistance lines. These are stocks that could potentially be poised for the largest gains based on their current chart patterns.
Our Findings
When screening for these three important factors, we found six different small cap companies that fit the criteria.
Arctic Cat Inc. (ACAT)
Market Cap: $495 million
P/E Ratio: 13.2
Arctic Cat is a designer, manufacturer, of snowmobiles and ATV’s. The company also provides accessories such as bumpers, wheels, track systems and other kits for their vehicles. Founded in 1982 in Plymouth, Minnesota, their strong falling wedge pattern started early January of this year. Since that time, their stock has lost some 35% in value from $58 to $38. Early this month, Artic Cat’s CEO Claude Jordan resigned, but the stock may have started its upward breakout on Tuesday when it broke past resistance at around $36 a share.
Community Trust Bancorp Inc. (CTBI)
Market Cap: $604 million
P/E Ratio: 13.9
Community Trust Bancorp operates as a bank holding company that provides commercial and personal banking as well as wealth-management services to small and mid-sized communities. The company was founded in 1903 and is headquartered in Pikeville, Kentucky. Their strong falling wedge started late February of this year, but it appears to remain in its early stages.
DTS Inc. (DTSI)
Market Cap: 316M
P/E Ratio: 14.6
DTS is a designer and provider of audio technologies. The company’s products are used in television, personal computers, smartphones, tablets, and many other electronics. The company was founded in 1990 and is headquartered in Calabasas, California. The stock’s strong falling wedge began early February of this year.
Changyou.com Limited (CYOU)
Market Cap: 1.34B
P/E Ratio: 7.86
Changyou.com Limited develops and operates online games in the People’s Republic of China. Primarily, they distribute massive interactive multiplayer online games. The company was founded in 2003 and is headquartered in Beijing. Changyou.com is a subsidiary of Sohu.com, and the stock’s been in a falling wedge since early November of last year. Since that time, the stock has depreciated 34% in value from $38 to $25.
Xinyuan Real Estate Co., Ltd. (XIN)
Market Cap: 324M
P/E Ratio: 2.96
Xinyuan Real Estate develops residential properties for middle-income consumers in China. The company also sells construction materials. Xinyuan Real Estate was founded in 1997 and is headquartered in Beijing. Their strong falling wedge began mid January of this year.
Steiner Leisure Ltd. (STNR)
Market Cap: 630M
P/E Ratio: 14.4
Steiner Leisure provides spa services and personal care products for men, women, and teenagers worldwide. The company also operates post-secondary schools, which provide education in massage therapy, beauty, and skin care. Steiner Leisure was founded in 1934 and is based in Nassau, the Bahamas. The stock’s strong falling wedge began late December of last year and since then the stock has depreciated 26% in value from $57 to $42.
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