Align Technology NASDAQ: ALGN
, HubSpot NYSE: HUBS
and Trex NYSE: TREX
are setting up in healthy areas of price consolidation, which may set the stage for fresh run-ups.
One proven strategy for grabbing a stock at the beginning of a run-up is by tracking its base. It’s frustrating for investors to see a stock pull back, but these patterns form when institutional investors sell shares, usually to take profits after a rally.
This year, you’ll likely see some profit-taking driven by capital-gains taxes. The marketwide rally in 2020 began in March, and gained steam as the year went along. Many investors like to wait until their holding is a year old before selling. At that point, they would pay long-term capital gains taxes, which are more advantageous than short-term capital gains taxes.
Whatever the reason for the selling, a base gives a stock a chance to pause its run-up before continuing its rally.
Align, whose flagship product is Invisalign, a clear dental alignment system, began shaping its current cup formation in February, around the same time as growth stocks, as an asset class, began retreating.
Although the company was profitable in 2020, it, like so many others, saw sales and earnings decline in the first half of the year. That changed in the second half of the year, as revenue and earnings growth resumed.
The cup-shaped base corrected 21% from peak to trough, at least so far. There was some heavy-volume selling during the initial weeks, but that stabilized, and volume has been muted recently, which shows the big selling could be in the rear view mirror.
Often, a catalyst for breaking out of a base is a better-than-expected earnings report, or at least a report that brings some kind of optimistic news. Align reports its first quarter on April 28, with Wall Street expecting earrings of $1.73 per share on revenue of $816.94 million. The company topped estimates in three of the past five quarters.
If the stock does break out soon, watch for heavy volume as it clears resistance at $634.46. It’s currently trading at around $613. Alternatively, it may form a handle if it pulls back further.
HubSpot, which makes a cloud-based customer relationship management system, is etching a cup-with-handle formation. This correction, like Align's, began in mid-February.
The company reports earnings on May 5. Wall Street expects a loss of $0.38 per share on revenue of $242.86 million. Hubspot has a history of beating estimates, so that’s something for investors to watch for.
The stock has fundamental strength, which is a box to check when you’re looking at bases close to a breakout. Revenue growth accelerated in the past two quarters. Hubspot managed to grow revenue in the first half of 2020, helped by a slew of companies pivoting to derive more of their revenue online.
In the current base, the top of the handle is $544.83, which is the price you want to see the stock surpass, preferably in heavy turnover. Trading volume during the handle area has been tepid, indicating just a mild round of selling, not a vast shakeout.
The stock is now trading near $533.
Another stock potentially nearing a breakout is Trex, which hails from the red-hot building and remodeling industry. The company makes engineered composite decking materials that won’t rot, stain, become termite food or require painting.
The stock is currently forming a somewhat shapeless consolidation, although it may possibly evolve into a cup with handle. An upcoming news catalyst for a breakout may be its May 10 earnings report. Wall Street is eyeing net income of $0.38 per share and revenue of $241.16 million.
Revenue growth accelerated from 7% to 39% in the past two quarters, always a sign of strong demand. Annual revenue also grew between 2018 and 2020.
One potential warning sign about its current base: It’s the fourth time the stock has pulled into a base in the past year. A fourth-stage base often indicates the run-up is getting long in the tooth, and the stock may need to undercut a previous structure low to fully flush out weak holders or those grabbing profits.
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