You are here

Under $7 Stock May be Traders' Ticket to 50%-Plus Profits

When it comes to finding stocks capable of solid short-term trading profits, investors often seek out potential positive catalysts to score quick gains. For example, I recently discussed an upcoming event that might give a quick boost to medical device maker Given Imaging (NASDAQ: GIVN).

But it's not just the appearance of positive catalysts that can boost a stock. Sometimes it's the removal of negative catalysts that can do the trick. And a notable technology firm that is deeply out of favor may soon make a comeback now that a key overhang on the stock is set to fade away.

Super-Charged Technology

Engineers often tinker with old technologies to see if they can glean new capabilities and uses from them. A key area of interest has been capacitors, which were first designed back in 1754. These devices are used to regulate the flow of energy, whether between various forms of current (alternate or direct), in a power source, or to stabilize the flow of voltage. Capacitors are also used to store energy, as they can quickly release lots of juice when needed (unlike batteries, which can store a lot more energy but release that energy more slowly).

Well, the engineers at Maxwell Technologies (NASDAQ: MXWL) seemingly struck gold by developing "ultracapacitors," which pack far more energy and can provide a quick jolt of juice in short bursts. Bus makers, for example, are starting to use Maxwell's devices to provide acceleration power, reducing the need for oversized engines that will rarely need to operate at full loads.

Investors were quick to grasp the promise of this technology, pushing shares of Maxwell above $20 in 2009, 2010, and again in 2011. The fact that sales grew at least 20% from 2008 through 2011 underscored that bullish stock price.

But the still-weak global economy led to an eventual slowdown in orders. Maxwell went through a tough slog in the back half of 2011 and into 2012, as sales guidance kept being lowered. The company was talking with many new potential clients, but few were signing large deals in recent quarters. And then the real trouble hit.

In March 2013, management conceded that some employees in the sales department had counted recent shipments as sales to end-user customers. Those employees were quickly terminated, but the damage was done as management looked feeble for allowing such activities to happen. After management told investors that it needed to go back over the past few quarters and restate results to account for the sales force shenanigans, investors abandoned the stock in droves.

The timing could not have been worse; business trends for Maxwell had just started to improve. A government changeover in China last fall had led to a freeze on transportation equipment orders, time the company used to do some product reconfigurations. And right around the time the accounting crisis hit in March, analysts at Crowell, Weedon & Co. noted, "The rack configuration has been completed and hybrid bus orders have picked up." (On a side note, Maxwell just announced a foray into the Chinese maritime industry, which should also boost growth.)

Cleaning Up the Mess

Maxwell's accountants are working to quickly ferret out all of the accounting issues in order to re-file its 10-Qs and a 10-K. The Nasdaq is expected to give the company more time to sort the mess out (though as of this writing, Maxwell had not formally issued news of an extension -- you'll want to wait until that happens before buying this stock).

Here's what we do know: Maxwell's business is still holding its own right now, and the great promise for its ultracapacitors remains fully intact. The company issued unaudited results for the fourth quarter of 2012 and the first quarter of 2013, citing sales of $41.9 million, and $46.6 million, respectively. That $46.6 million figure, by the way, is a company record, and represents 20% growth from a year earlier. That sets the stage for nearly $200 million in revenue this year, which is not bad for a company that had $101 million in revenue in 2009.

As soon as this accounting mess is cleared up, look for investors to give this dynamic growth stock a fresh look. It's likely going to be quite some time before this stock reverts back to the $20 levels seen a few years ago, but a quick move back to $10 looks quite plausible. That means this stock may have 50%-plus upside from current levels in just a quarter or two.

Assuming the above-cited catalysts play out, it's wise to have a 3-4 month time frame for Maxwell Technologies.

Recommended Trade Setup:

-- Buy MXWL up to $7.50
-- Set stop-loss at $5.50
-- Set initial price target at $10 for a potential 33% gain in four months