Wednesday’s TSX breakouts: This undervalued has a 50% potential return

The number of stocks on the positive breakouts list (stocks with positive price momentum) fell to 28 companies with a notable decline in resource stocks as commodity prices retreated on Tuesday. While the number of stocks on the negative breakouts list (stocks with negative price momentum) is low at just five companies.

Discussed below is a new entrant to the positive breakouts list – Halogen Software Inc. (HGN-T)

A brief outline is provided that may serve as a springboard for further fundamental research.

The company

Ottawa-based Halogen Software is a cloud-based software services firm focused on providing talent management or human resources solutions. The company provides software that assists firms in the employee lifecycle from the initial hiring (recruitment and onboarding), to retention (employee appraisals, learning and development), to retirement or termination (succession and compensation).

The company has over 2,000 customers globally in the mid-market. The mid-market is defined as companies with between 100 and 10,000 employees. Amongst its customers are companies such as Sony, Nestle, University of Toronto, Baylor University, Shriners Hospitals, and Bank of Queensland.

The company has a subscription-based model providing the company with high revenue visibility. The company offers initial customers two year contracts with automatic annual renewals. Approximately 91 per cent of the company's total revenue is recurring.

The company has delivered solid growth, with total revenue rising to $65.7-million (U.S.) in 2015, up from $56.7-million in 2014 and $48-million in 2013.

The company has a solid balance sheet with no debt and over $36-million in cash and equivalent at the end of 2015.

Dividend policy

The company does not pay shareholders a dividend.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-sales multiple of 1.15 times the 2016 consensus estimate, at a discount to its peers and its historical average, suggesting there is room for the multiple to expand.

Analysts' recommendations

According to Bloomberg, there are five buy recommendations and one analyst with a hold recommendations. There are no sell recommendations. The average one-year price target is $11.17, suggesting that the share price may appreciate 50 per cent over the next year.

The consensus revenue forecast is $73-million in 2016, rising 11 per cent from $65.7-million in 2015. This is relatively in-line with management's top line guidance of between $72.6-million and $73.6-million.

Of importance is management's expectations that the company will report positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2016, turning EBITDA positive.

Chart watch

Since mid-2015, the stock price has been in a solid downtrend, but in recent months has been trading sideways, or consolidating, around the $7 level.

The stock's next overhead resistance level is around $8, then around $8.50, which is near its 200-day moving average.

There is downside support around $7, close to its 50-day moving average. Failing that, there is support around $6.60.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a stock to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a stock appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Below is a list of stocks in the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Stocks on the positive breakouts list have displayed positive price momentum during this period. Stocks on negative breakouts list have experienced negative price momentum.