Satellite imagery provider DigitalGlobe (DGI), which went public in mid-May, was the fifth U.S. IPO in 2009, and is part of a larger and very exciting trend in the IPO market.
With Morgan Stanley (MS) and JPMorgan (JPM) as lead managers on the deal, the company raised $279 million by offering 14.7 million shares at $19, which was above the proposed $16 to $18 range.
DigitalGlobe is a leading global provider of high-resolution satellite imagery for defense and commercial applications, such as Google Maps. According to the company, “With advanced collection sources and a comprehensive ImageLibrary containing more than 730 million square kilometers of imagery and imagery products, DigitalGlobe offers a range of online and offline products and services designed to enable clients to access and integrate imagery seamlessly into business operations and applications.”
That’s a nice little niche, but if you’re familiar with me, you know that I like to trade best-of-breed IPOs with in-demand products or services, using technical analysis as my guide. (If you’re not familiar with my IPO trading strategy, I suggest you take a look.)
A Bull in a China Shop
DGI is displaying a classic cup-and-handle-pattern, which is a bullish chart formation. (See five other bullish chart patterns.)
As the name would suggest, a cup-and-handle pattern resembles a coffee cup with a right-side handle, and indicates the potential for an uptrend.
It includes an elongated U-shape followed by a short period of consolidation, usually lasting one to two weeks in duration, which tends to be downtrending. The cup always precedes the handle, and as it develops, the price pattern follows a gradual bowl shape. There should be an obvious bottom to the bowl (a V-shaped turn is not a good indicator).
The handle tends to be down-sloping, and indicates a period of consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit.
You can track the down-sloping angle of the handle by drawing trendlines across the upper and lower price limits. If the price ascends outside of the trendlines, then it has the potential for breakout. If the price ascends beyond the upper, right side of the cup, then the pattern is confirmed, particularly if it is accompanied with a sharp increase in volume. (Learn more about how volume factors into a cup-and-handle.)
The good news with DGI is that it fits this pattern’s criteria to a “T.”
With this pattern, the depth of the cup indicates the potential for a handle and subsequent breakout to develop. The cup should be fairly shallow.
In this case, DGI pulled back from the $25 level and formed a base around the $16 level, giving it about a $9 consolidation zone.
How to Trade DGI
As for how far to play this pattern, you can go long the breakout above $25 a share for a move to the mid-$30s. Or you can go long in the handle if you feel confident enough (as I do) that a breakout isn’t just probable, it’s nearly a given!
Editor’s note: DigitalGlobe reported better-than-expected third-quarter earnings after the close today. The company also revised its full-year 2009 outlook higher. This means DGI could see a big move up tomorrow, so don’t wait to jump on this trade.
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