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.

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 $42.5 million.
  • BRCD has traded 2.7 million shares today.
  • BRCD traded in a range 216% of the normal price range with a price range of $0.50.
  • BRCD traded above its daily resistance level (quality: 1 day, meaning that the stock is crossing a resistance level set by the last 1 calendar day. 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 storage area networking (SAN) and Internet protocol networking solutions for businesses and organizations worldwide. It operates through SAN Products, IP Networking Products, and Global Services segments. The stock currently has a dividend yield of 1.1%. BRCD has a PE ratio of 22. Currently there are 3 analysts that rate Brocade Communications Systems a buy, no analysts rate it a sell, and 14 rate it a hold.

The average volume for Brocade Communications Systems has been 3.8 million shares per day over the past 30 days. Brocade Communications Systems has a market cap of $5.2 billion and is part of the technology sector and computer hardware industry. The stock has a beta of 1.28 and a short float of 2.4% with 3.08 days to cover. Shares are up 1.5% 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 solid stock price performance, growth in earnings per share, increase in net income, revenue growth and attractive valuation levels. We feel its strengths outweigh the fact that the company shows weak operating cash flow.

Highlights from the ratings report include:

  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 46.16% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, BRCD should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • BROCADE COMMUNICATIONS SYS has improved earnings per share by 11.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, BROCADE COMMUNICATIONS SYS increased its bottom line by earning $0.54 versus $0.45 in the prior year. This year, the market expects an improvement in earnings ($0.94 versus $0.54).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Communications Equipment industry. The net income increased by 7.9% when compared to the same quarter one year prior, going from $80.88 million to $87.27 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 2.8%. Since the same quarter one year prior, revenues slightly increased by 2.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

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