The stock: DragonWave Inc. (DWI-T)
Recent price: $10.15
Trend: Investors have been connected to the wireless broadband explosion manifest in consumer demand for the iPhones, Blackberrys, and other popular smart phones. The geometrically growing demand of bandwidth-hungry smart phone applications is taxing cellular networks, forcing rapid upgrades of existing networks and the deployment of new technologies that expand wireless capacity. Not surprisingly, the stocks of many of the companies delivering components of this infrastructure build-up have been trending positively.
The Powershares Dynamic Networking exchange traded fund hit a new high last week on high trading volume, while the iShares North American Networking ETF also approached its high. Both of these funds have been Stock Trends bullish for the past three quarters and represent holdings in major networking hardware names such as Cisco Systems Inc., Juniper Networks Inc., and JDS Uniphase Corp. Shares of JDS Uniphase traded aggressively last week and have made a particularly strong move in the past month - advancing almost 40 per cent.
Although the fundamental core of this sector's strength remains appealing, investors should always be alert for stocks that have moved against the group's technical uptrend. When a stock's performance diverges from its sector, or from the broad market's, shareholders observant of the technical strength of their holding should consider taking profits or paring their holdings.
The trade: Ottawa-based DragonWave Inc., a provider of microwave technology backhaul solutions for cellular networks to expand capacity, has garnered much investor enthusiasm in the past year. Its shares rose to a high of $14.55 in January from $3.58 last spring when it was a Stock Trends Bullish Crossover stock and a notable early May stock pick based on its high volume of trading, positive change in long-term trend and price momentum. Investors who confidently rode this trend were rewarded with one of the best TSX small-capitalization tech trades of the past year.
However, DragonWave's stock appears to have blown a fuse in recent weeks. Perhaps concern about the pipeline potential for the company - DragonWave was notably dependent on one major contract with Clearwire Corp. - has investors anxious to take profits off the table. Last week's share price tumbled 17 per cent, dropping the stock below the 13-week moving average trend line and previous price support above $11. The stocks of DragonWave's industry peers have also retreated since the beginning of the year, another consideration for downgrading this winning trade. Ceragon Networks Ltd. is threatening to drop below its trend line, while Aviat Networks Inc. has been Stock Trends Weak Bullish since its stock slid below trend at the beginning of February.
For the first time since the stock broke out in its bullish trend last year, DragonWave's trend trading shareholders have reason to say a wistful goodbye to a very rewarding investment.
The upside: Trading is all about booking real profits. Watching paper profits disappear over the last period may force more DragonWave shareholders to be especially covetous of remaining value, putting more pressure on the stock.
The downside: Selling a winning position is rarely a slam dunk no-brainer. This stock's recent drop below its trend line flies in the face of what can still be described as positive fundamentals for DragonWave and other companies delivering backhaul connections solutions for exploding cellular traffic. The underlying story remains compelling and it is possible this stock will recover its bullish trend.