Micro-cap tech company Aviat Networks (AVNW) climbed sharply on Wednesday without a clear catalyst for the action. Without any specific news, it would appear that the technical metrics for the stock, which pointed to it being oversold, helped kickstart the day’s gains that picked up momentum buying as the day wore on.
Tech Stock Opens Even, Gains Steadily
Aviat’s stock opened at the same price it closed Tuesday on, and entered the day without any clear news to make for a major change in price. However, Aviat may have only needed a small spark to get Wednesday’s fire going. Shares gradually gained over the course of the day, and were up almost 14 percent headed into the last hour of trading.
After opening at $1.04 a share, the stock hit an intraday high of $1.21 a share for a gain of 16.3 percent, before pulling back. Gains were trimmed significantly after that peak, though. Share's ultimately fell back to $1.12 by the closing bell, for a gain of just 6.73 percent.
The gains came on heavy volume, with almost 3 million shares moving by an hour prior to the closing bell against an average daily volume of under 1 million shares. This included a heavy spike in volume just before 2 pm ET that preceded the spike that took the stock to its intraday high.
The spiking volume on gains that built over the course of the day would seem to indicate that Aviat became a focus for momentum buying once it started to take off, a theory that could be supported by the retreat in the final hour prior to the closing bell as day-traders and momentum buyers would likely be liquidating their positions and taking profit before the end of the day.
Aviat is a global supplier of microwave networking solutions, manufacturing and selling a range of wireless networking products.
Oversold Micro-Cap Was Poised for Day’s Spike
A closer look at Aviat’s technical numbers should indicate that this was a stock waiting for the right nudge to get it going. Aviat has been sitting firmly in oversold territory ever since the company produced a Q3 2014 earnings report after market close on May 6 that seriously disappointed the Street. Shares plunged 26.85 percent on May 7.
These sell-off, though, may have overdone it. It pushed the share-price below the bottom Bollinger Band, drove the 14-day RSI below 20, and pushed the 14-day stochastic RSI all the way down to 0.00. While the fifth-straight quarter of declining revenues was clearly a disappointment, the size of the dip appeared to be too much.
Stock’s Rebound Could be a Sign of What’s to Come
While Aviat’s recent performance isn’t what many investors might like, there’s plenty of reasons to expect the company to produce better results moving forward. Add to this the fact that Aviat’s stock is currently cheap (very cheap, if you ask Seeking Alpha’s Hawkinvest, in an article written prior to the sell-off following the Q3 earnings report), and Wednesday’s climb may start to look less like a purely technical-driven momentum play by day traders and more like one where a significant piece of the action was driven by long-term investors finding the perfect buying opportunity on a growth stock with real potential.
Aviat’s presence among the Small-Cap Stars shows that the company’s fundamentals are in line with the most-successful small-cap and micro-cap companies in its industry in the recent past. Aviat’s finances should point to a company that’s maximizing its opportunities for success.
What’s more, a look at the company’s DuPont Report paints a stronger picture of a company with a strong chance to grow significantly in 2014. The DuPont System for analysis uses return on equity (ROE), a key metric in analyzing how efficiently a company converts its assets into profits, and separates that figure into three components to get a better understanding of what’s driving the number. It can sometimes indicate that a company’s ROE may indicate more strength or weakness than the whole number alone would tell you.
And, in the case of Aviat, the results are strong. The company has an equity multiplier and level of asset turnover that exceed the industry average, which is less than ideal. In both cases, a number too high or low isn’t a good sign. However, Aviat’s net margin is ahead of the industry average by a wide margin. And, unlike asset turnover or the equity multiplier, net margin is a metric where higher is better without any sort of limit.
So, while Aviat’s ROE isn’t ahead of the industry average by much, it’s driven by a major advantage in the company’s profitability, a decidedly positive sign. What’s more, looking at these numbers from 2012 to 2013 show that they’re moving in the right direction. While asset turnover increased, which is not ideal, ROE and net margin both improved, and the equity multiplier decreased, moving closer to the industry average.
"Smart Money’s" Already on Aviat
On the whole, Aviat’s gain on Wednesday could be a sign that the stock, which has a lot of promise for potential growth, was oversold. If the markets start to emerge from the current correction that has seen investors fleeing from growth plays like Aviat, undervalued micro-caps with solid finances and serious potential for growth are likely to be the major benefactors.
And it’s clear that Aviat already has institutional investors in its corner. Far from being an unknown micro-cap, Aviat has institutional ownership levels in excess of 75 percent, showing that the “smart money” is already backing the company.
Aviat’s going to have to show profits moving forward to get any traction, but, should the rest of 2014 bring improved sales with it, Aviat could be poised to create huge returns for its investors.