Trade of the Day: iRobot (IRBT)

I admit to being a technology addict. As I look for my next fix, I buy the latest computers, laptops, scanners, tablets, watches, etc. as soon as they are released. This can be fun but I will also admit to having a closet full of garbage products (Leap Motion, Google G1, wireless USB, etc.) that failed to live up to my hopes. In my experience, I have found an interesting clue for uncovering a winning product – Amazon (AMZN) ratings.

Not just any Amazon 5-star review will do, of course. The best clue that a technology product will exceed my expectations are when there are more than 500 reviews, the average rating is over 4 stars, and the price is more than $500. There are very few tech products that fall into this elite category. Apple’s (AAPL) iPhone/iPad, Canon’s (CAJ) Rebel DSLRs, Toshiba’s Snapscan, and the GoPro camera are all examples of this elite category of technology products. On average they all do more than expected and, despite their price, are a good value. (Find all you need to know about Apple’s iOS 7.1 release here).

My theory is that people willing to spend a few hundred bucks on a new product are not reluctant to write a very bad review when they are disappointed. Therefore, widespread fondness for an expensive gadget that is inevitably doomed to short-term obsolescence must be quite remarkable indeed. Such a product can’t just be a fun novelty. It must materially improve or change your life. According to Amazon, the Roomba vacuum is such a device.

The Roomba is made by iRobot (IRBT) and newer versions are priced between $500-$700. The Roomba is an autonomous robot vacuum cleaner that sweeps/mops/vacuums your floor on its own and returns itself to a charging station. As the owner of a lab/German shepherd mix dog, I can really get excited about a device that takes care of vacuuming of the main floors for me. However, Amazon ratings and my own tech-bias aside, do investors agree that IRBT is poised for growth?

IRBT’s sales and revenue growth have been very strong over the last five years. The company recently introduced a new model called the 880 that almost seems to be bordering on becoming self-aware. Who would have guessed that the predecessor of SkyNet would have come from a vacuum company rather than the military?

IRBT’s CEO, Colin Angle, said that sales of the 880 have “exceeded sales of all other new products over the same time frame.” This sounds like a growth story to us, but what about the charts?

IRBT’s stock finally breached its IPO price this year without a quick reversal lower. As you can see in the chart below, the stock broke resistance of $37.50 per share last month following their earnings report. That sounds good and the new models are certainly helping to boost investor’s expectations. However, from a technical perspective, the stock isn’t in the clear yet.


When a stock breaks resistance, it is very common for a retracement back to that level where it is then treated as support. IRBT broke long term resistance of $37.50 and short term resistance at $40.25 in February. Last week, the stock treated short term resistance as support and bounced temporarily. However, a slow market and stress about consumer spending has kept the stock channeling above support but below its post-earnings highs.

We recommend a new entry when the stock bounces off support again in anticipation of a move to $50 per share in the near term. Currently, we are targeting an entry on another bounce off $40.25 (give or take $.50 per share). Traders should place a stop loss under long term support (formerly resistance at $37. The retail sales report will be released this week from the U.S. Census Bureau and could serve as a catalyst for the expected bounce higher.

Option traders may want to look at the June at the money calls. However, because the options on IRBT are thinly traded, the spread between the bid and ask is a little wide. That will increase the cost of the trade and it increases the importance of using a limit order to enter the position.

InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.

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