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TheStreet Open House

A Small-Cap Energy Stock Fueling Up to Break Out

DELAFIELD, Wis. (Stockpickr) -- Breakout trading is a trading strategy that involves taking a position in a stock during the early stages of a possible new uptrend. If your timing is right, you can find yourself ahead of the crowd as the stock begins its course for higher prices.

>>5 Big Charts Ready to Break Out in May

I scan the markets every day for potential breakout candidates that look to be setting up to take out key defined resistance levels. I look for stocks that are coming off clear support levels and that are starting to spike higher with unusual volume flows. That unusual volume can be a sign that smart money is moving into the stock and getting ready to take out the sellers that are in control at clear resistance points. Once a stock takes out those clear resistance levels, then it is free to embark on a new price discovery journey.

Once a stock enters breakout territory, you usually see an increase in volatility as the control for that stock moves from the bears to the bulls. Bears like to be sellers at resistance, so once they lose control it can be a clear message from the market that the bulls are in the driver's seat and the stock is ready for a major price trend. That being said, breakouts are not a guarantee and many times you will see a stock start to break out and then fail. That's what we call a "fake out" in the trading community.

>>5 Stocks Under $10 Set to Soar

One sector that's been in play recently for breakout traders is energy. This sector has been red hot as geopolitical tensions continue to mount in Ukraine and in other hot spots around the word such as Syria. While the market has been slaughtering momentum stocks and high-multiple stocks, the energy stocks have been seeing money flow. Energy stocks generally don't trade at sky-high multiples, and they're considered a great hedge for geopolitical risks.

With that in mind, one under-$10 independent energy player that's setting up here for a breakout trade is Gastar Exploration (GST), which is engaged in the exploration, development and production of oil, condensate, natural gas and natural gas liquids in the U.S. This company has a market cap of $386 million and an enterprise value of $662 million. This stock trades at a very reasonable valuation, with a forward price-to-earnings of 9.9. Its estimated growth rate for this year is 52.6%, and for next year it's pegged at 117.2%.

Just recently, Wunderlich Securities started coverage on Gastar Exploration with a buy rating on a price target of $9 per share. Analyst Jason A. Wangler said: "The company has gone through a transformation with multiple acquisitions and divestitures but is now positioned with two strong, scalable core assets in the Appalachia and Mid-Continent regions. We like the company's growth prospects from its proven Marcellus and Hunton targets and see strong upside potential in the Utica, Woodford, and Meramec formations that could generate value."

Gastar Exploration reported earnings earlier this week for the first quarter of 2014, and it said adjusted net income was $1.4 million, or 2 cents per share. The company said adjusted EBITDA was $25.9 million, or an increase of 71% vs. the adjusted EBITDA of $15.1 million for the first quarter of 2013. Revenue from production soared by 154% to $38.8 million for the first quarter of 2014 vs. $15.3 million for the same quarter in 2013.

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