$ACIA: 50% Upside from Today's Close!

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Shares of the May, 2016, IPO Acacia Communications ($ACIA) have been trading more or less sideways since hitting an IPO high of around $125 per share back in mid-August. The stock price trailed off to the $100 twice, and in between tested the IPO high again, but without breaking out. With shares dropping sharply today below the $100 support level, then climbing back up above that level to $102 by today's close, the stock is now poised to make a strong run toward new all-time highs.

Adding fuel to the technical fire of the stock price is a report released by the company after today's close. For the 2nd time in a week, the company's CEO raised its earnings guidance, along with upwardly revised revenues and sales numbers. Never mind that the company also priced in 4.5 million shares added to the float. Those were bought eagerly today by funds ahead of the company's earnings report about a month from now. Instead, all eyes were on the new numbers for Q3:

  • Adjusted revenue expectations were boosted to $130M-$133M
  • Net income numbers were raised to $34M-$37M
  • EPS was then set at $0.83-$0.90

If the report comes in the middle of that EPS range, this would put Acacia's current multiple at around 115, in the top 1/3rd of the 62 companies in the space. It would also peg this year's EPS growth at an amazing 350%, or 4th best on the list. Shares of ACIA carry a Zacks Rank of 2 on a scale of 1 (best) to 5 and has received a buy or better from all analysts covering the company. The consensus price target is currently at 114, but this is likely to be revised higher based on today's report.

I think shares of $ACIA will trade up to $116 near-term to fill the gap, then test the $125 IPO high. If that gives way, we should see the stock move into a new trading range with a high of around $150 at the top end. This estimate is based on the chart below:

This 2-hour intraday chart shows the clear uptrend in $ACIA, followed by the several week-long consolidation period. Bullish rectangles like this one are the #1 most reliable bulllish chart pattern, according to Bulkowski's "Encyclopedia of Chart Patterns." When we see rising On Balance Volume (the indicator at bottom) within the pattern, we know that shares are being accumulated by professional investors in anticipation of a pattern breakout.

We measure the pattern by sutracting the value of the upper horizontal R-line from the value of the lower horizontal S-line. This gives us a spread of about $25. This figure we then add to the R-line giving us our price target upon breakout: roughly $150. This represents a nearly 50% premium over today's closing price.

As always, do your own due diligence before buying or selling any stock or investment.

Regards, TC

Posted to Dr. Stoxx Options Letter on Oct 04, 2016 — 6:10 PM
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