Jump on This Stock Before Its Next Big Breakout
A chart pattern we are always excited to spot is the ascending triangle.
Consisting of a horizontal resistance line at its top and an uptrend line at the bottom, the ascending triangle has a bullish bias. It is seen by technical analysts as a “continuation” pattern, which is a pause in an uptrend.
In other words, spotting an ascending triangle means spotting a stock with a strong probability of heading higher — especially when the pattern is combined with solid fundamentals. Plus, because of the uptrend line, the ascending triangle pattern allows investors to control risk by setting a clear stop-loss.
To bet on an ascending triangle, investors can either buy within the pattern or play it safe and wait for a breakout. If you decide to wait, you need to keep your eye on the ball and have the patience to keep watching shares as they consolidate before a breakout. We are particularly excited about this pattern on the chart of Convergys (NYSE: CVG).
Convergys was founded in 1998 as an offshoot of Cincinnati Bell and is now the second-largest global provider of customer and information management services. By revenue, it is the No. 1 customer management company in the United States, and it counts half of the Fortune 50 companies as its clients. Convergys says its goal is to establish “long-term strategic relationships with large companies in customer-intensive industries.” Its largest clients are in telecommunications: AT&T (NYSE: T) accounted for about 15% of revenues in 2014, while DirectTV and Comcast (NASDAQ: CMCSA) provided just under 10% each.
Convergys was founded in 1998 as an offshoot of Cincinnati Bell and is now the second-largest global provider of customer and information management services. By revenue, it is the No. 1 customer management company in the United States, and it counts half of the Fortune 50 companies as its clients.
Convergys says its goal is to establish “long-term strategic relationships with large companies in customer-intensive industries.” Its largest clients are in telecommunications: AT&T (NYSE: T) accounted for about 15% of revenues in 2014, while DirectTV and Comcast (NASDAQ: CMCSA) provided just under 10% each. Convergys provides customer contact through agents via chat, email, Internet and voice.
So if you have an account with AT&T, it’s quite likely that the person you’ve spoken with about adding services or the details of your bill worked for Convergys, not AT&T. The company has over 125,000 employees worldwide thanks to the 2014 acquisition of SGS Holdings (also known as Stream), which added 40,000 staff in 22 countries. It now operates in over 31 nations and 58 languages.
Two key trends are helping Convergys win new business. First, clients are increasingly emphasizing the creation of a satisfying customer experience, which often means trusting the function to companies with specific expertise. Meanwhile, the increasing complexity of calls received by customer service centers is also cited as a motivation for clients to use Convergys’ services.
These trends are driving strong results. In the third quarter, the company beat on earnings although it missed on revenue. Earnings per share were $0.56 before one-time items, which reduced them to $0.45. Analysts had expected $0.44 after one-time items, while earnings for the comparable period of 2014 were just $0.42.
Sales tallied $741.6 million — down a little more than 1% from the year-ago quarter. However, as the company noted in a conference call, revenue actually increased about 2% on a currency-adjusted basis. About 20% of the company’s revenue is earned in non-U.S. dollars.
Analysts are optimistic about the future, too. They expect earnings per share of $1.72 for 2015, while 9.3% growth to $1.88 is expected for the year after. These strong fundamentals, plus the stock’s bullish chart pattern, make for the perfect storm.
Convergys is up almost 25% in 2015, while the S&P 500 is virtually unchanged.
As the chart above shows, the stock bottomed near $8 in October 2011. By late December of that year, CVG had recovered to over $12. It is from near that level that we can draw an uptrend line — one that remained intact for almost three years.
Twice during the uptrend — in January and May of 2014 — shares tested resistance near $24 but couldn’t penetrate that level. A sharp pullback took them back to the mid-$17 range in early October 2014. From there, the stock rallied to over $21 in early November, pulled backed to the mid-$18 range and then rallied sharply again.
But this May, Convergys blew through resistance near $24, approaching the mid-$26 level by late June. By the end of August, however, shares had fallen to the $20 range from where they made another run. In late October, they retested the mid-$26 level, retreated to support near $24 and have been trapped in a narrow rectangular range since, with resistance in the mid-$26 range and support at $24.
An accelerated trendline drawn from the August low currently intersects the chart at $24. Combined with resistance in the mid-$26 range, it forms an ascending triangle. Within this triangle, a rectangle can also be made with resistance at $26 and support near $24.
The $24 level should provide strong support for three reasons. First, it was resistance in the early part of 2014. Second, the accelerated trendline crosses at this level. And third, the bears have not been able to push the stock below $24 on a closing basis in the past 12 trading weeks. A stop-loss set slightly below this level at $23.79 should provide good protection.
As we mentioned before, there are two different ways to trade an ascending triangle — either buy it now or wait for a breakout.
If and when the CVG breaks out, the measuring principle can be used to set a price objective. This principle says to take the height of the ascending triangle pattern ($26.51-$20.43 = $6.08) and add it to the breakout level ($26.51+$6.08 = $32.59). That target is nearly 30% above the recent price. This gives the trade a very attractive risk/reward ratio of about 5:1.
Given the strong support at $24 and the limited risk from current levels, it makes more sense to buy this ascending triangle before the breakout.
Recommended Trade Setup:
— Buy CVG at the market price
— Set stop-loss at $23.79
— Set price target at $32.59 for a potential 29% gain by Q4 2016
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