Barbarian At The Gate: Brocade Communications Systems (BRCD)

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified Brocade Communications Systems ( BRCD) as a "barbarian at the gate" (strong stocks crossing above resistance with today's range greater than 200%) candidate. In addition to specific proprietary factors, Trade-Ideas identified Brocade Communications Systems as such a stock due to the following factors:

  • BRCD has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $29.4 million.
  • BRCD has traded 4.9 million shares today.
  • BRCD traded in a range 211.3% of the normal price range with a price range of $0.36.
  • BRCD traded above its daily resistance level (quality: 133 days, meaning that the stock is crossing a resistance level set by the last 133 calendar days. The resistance price is defined by the Price - $0.01 at the time of the signal).

Stocks matching the 'Barbarian at the Gate' criteria are worthwhile stocks to watch for a variety of factors including historical back testing and volatility. Trade-Ideas targets these opportunities because the stock is exhibiting an unusual behavior while displaying positive price action. In this case, the stock crossed an important inflection point; namely, 'resistance' while at the same time the range of the stock's movement in price is more than twice its normal size. This large range foreshadows a possible continuation as the stock moves higher.

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More details on BRCD:

Brocade Communications Systems, Inc. provides Internet protocol based networking solutions and storage area networking (SAN) solutions to businesses and organizations worldwide. The stock currently has a dividend yield of 1.5%. BRCD has a PE ratio of 17.0. Currently there are 5 analysts that rate Brocade Communications Systems a buy, 1 analyst rates it a sell, and 11 rate it a hold.

The average volume for Brocade Communications Systems has been 4.6 million shares per day over the past 30 days. Brocade Communications Systems has a market cap of $4.0 billion and is part of the technology sector and computer hardware industry. The stock has a beta of 0.78 and a short float of 3.9% with 5.73 days to cover. Shares are up 6.2% year-to-date as of the close of trading on Thursday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates Brocade Communications Systems as a buy. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, good cash flow from operations, expanding profit margins and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the ratings report include:
  • Although BRCD's debt-to-equity ratio of 0.26 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 2.55, which clearly demonstrates the ability to cover short-term cash needs.
  • Net operating cash flow has increased to $168.24 million or 40.65% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 5.10%.
  • The gross profit margin for BROCADE COMMUNICATIONS SYS is rather high; currently it is at 69.88%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -2.54% is in-line with the industry average.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

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