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Peter Allen, CEO of DragonWave in Ottawa May 7, 2010. (Blair Gable For The Globe and Mail)
Peter Allen, CEO of DragonWave in Ottawa May 7, 2010. (Blair Gable For The Globe and Mail)

Schizas’ Mailbag

DragonWave still labouring under a downtrend Add to ...

Hey Lou,

What are your thoughts on DragonWave? I have been following them for a few years and they had a nice run to over $14 per share at one point due to orders from the United States.

They seem to have some potential growth opportunities coming down the pipeline with a newly signed U.S. carrier and some additional business recently announced in China, Europe, and Kuwait.

What do you think is the potential upside?

Thanks, Ken

Hey Ken,

Thanks for the assignment. This will be the second time that I assess the situation at DragonWave Inc. (DWI-TSX). The last time was on March 19, 2010 on a request from Harry. The shares were trading for $10.59 and he wanted to know if the stock had corrected enough and if it was a good time to buy. The research conducted on his behalf identified that the shares had run hard from their 2008 lows but the retreat from $13.96 in early January of 2010 had breached the uptrend line. It was advised that it would be prudent to think about taking profits.

In hindsight that was the correct call. The shares continued to give up ground reaching a low of $1.12 in November, 2013. Another examination of the charts will help inform my thoughts on DWI.

The three-year chart paints a picture of a stock in an aggressive decline struggling with resistance along its moving averages and the downtrend line. There have been some opportunities to trade DWI in the decline with some opportunities longer-lived than others. The MACD and the RSI both signalled a buy in April, 2013 followed by a sell in July. The momentum indicators also generated a buy off the November, 2013 lows.

The six-month chart depicts the advance through the 50-day moving average in December and the attempt to break above resistance along the 200-day moving average. In reviewing the news stream associated with this company it is evident that its the deal flow that you mentioned in your email that has been driving the stock. The question that needs to be answered is how many more deals can investors expect to hit the wires? And will these agreements add to the bottom line? Currently the MACD and the RSI are not signalling a reversal.

If you like the risks associated with a stock labouring under an established downtrend, with a market cap of approximately $92-million, and average daily volume of 116,000 shares a day over the last 30 days, then I would advise waiting until the stock breaks above $2.22 with conviction.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lschizas@globeandmail.com.



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