An Internet Bubble Survivor That Could Double

Many of the hottest stocks from 1999 were underfunded ideas. When the bubble popped in early 2000, many tech companies with weak financials went bankrupt. The crash served as a stress test for tech companies. Those that survived generally had sound financials and better business models.

One of those survivors looks ready to move much higher. Its shares are still 85% below their all-time highs, but they’ve caught the attention of traders: Shares are up more than 1,100% in the past three years.

Being noticed by traders is critical to a stock’s success. No matter what the fundamentals show, the only thing that moves a stock price higher is increased demand for the stock. If traders never notice a company, the stock price will at best move in line with the market. #-ad_banner-#

To find stocks that traders want to own, I look at a simple screen to see which stocks have had the biggest gains in the past 26 weeks. A number of studies have shown that the biggest winners from the past 26 weeks are likely to outperform in the next six months.

This week I found a company that makes equipment needed to clean machines used to make circuit boards. It’s a high tech survivor with long-standing customer relationships that could deliver steady sales in the future.

FASII appears to be undervalued based on earnings. Analysts have been raising their estimates in the past few days after a great earnings report in March. They now expect the company to report earnings of 41 cents per share this year. The stock market is trading with an average price-to-earnings (P/E) ratio of about 13. FSII is growing much faster than the market and should support a higher than average P/E ratio. Yet based on next year’s earnings, the P/E ratio is only about 11. If FSII traded at 15 times earnings, a small and reasonable premium to the market for a company with earnings expected to grow by 94% this year, the stock would be trading at $6.15.

For next year, analysts think that FSII could earn 68 cents per share. At a P/E ratio of 15, that level of earnings gives us a price target of $10.20 for long-term investors, a gain of about 120% from recent trading levels.

In addition to fundamentals, the chart of FSII also says it’s a buy. Relative strength is high and momentum indicators such as MACD are bullish.
 


Potential rewards are so high because FSII has disappointed investors in the past. They have a long history of sales but have only been profitable for the past two years. The company seems to have turned a corner to steady profits, but traders need to manage risk on this trade, just as they do on any other trade.

The daily chart shows that FSII would break below its lower Bollinger Band with a close below $4.20. Risk is limited to less than 10%, and the potential gains are three times that level in the short-term and more than ten times that level in the long-term.

Once again, the portfolio for my 26-week ROC strategy is unchanged this week. That strategy will continue holding Vanguard REIT (VNQ), SPDR S&P 500 ETF (SPY) and Vanguard Small-Cap ETF (VB).