Stocks that appear to be stuck in a rut can be extremely frustrating, and impatient investors may fall victim to their seemingly endless sideways trading by selling too early.
But by keeping the underlying fundamentals of the company in mind, patient investors can wait around for the bounce. And when that stock does break out of its tight trading range, it’s finally off to the races.
That’s exactly what’s happening with one of my Breakout Stocks Under $10 positions.
Merge Healthcare (MRGE) is a medical imaging software company that had been on a roll over the last year as a restructuring effort lowered costs and won the company new customers. In just six months, the stock had climbed nearly 180% to a new 52-week high of $6.20 on April 24. That momentum was halted when a disappointing first-quarter earnings report sent the stock plummeting just a few days later.
While adjusted earnings gained by a penny per share, sales growth of just 7% to $54.4 million was viewed as disappointing by analysts, and the market reacted accordingly.
The Importance of Being Patient With MRGE
I, on the other hand, saw the selloff as an attractive opportunity to benefit from the coming rebound, but the stock needed more time that I had originally thought. As you can see in the chart below, MRGE traded in a tight range between $4.45 and $4.75 for much of May before breaking through support and falling to lows not seen since March.
After reaching bottom, MRGE found renewed strength amid a slew of positive headlines and rallied into the end of June. While the market’s recent volatility hasn’t exactly been helpful, I’ve been extremely pleased to see the shares regain much of the ground they lost earlier this summer.
Today, Merge Healthcare has made a spectacular rebound, climbing nearly 20% from its recent lows. Going forward, I expect this trend to continue, especially since the company remains profitable and on a solid growth track. Plus, I don’t anticipate a second-quarter earnings report and reaction similar to what happened in April.
In fact, earnings expected on July 23 could be the catalyst this stock needs to finally break through the ceiling.
While not all pullbacks play out this way, it’s a good example of how keeping your cool can help your portfolio. Rather than making a knee-jerk decision to sell for a significant loss, we reevaluated our position and stuck around given the support levels indicated on the chart. Now, we’re reaping the benefits of the recent turnaround in MRGE, and we’re positioned for further upside ahead.
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