A Recipe For Potential Breakout

Anyone who’s visited their doctor, had their blood drawn, or been hospitalized has seen medical waste—needles, gloves, and bandages just to name a few—deposited into hygienic plastic bags. The company I want to bring your attention to today, Sharps Compliance Corp. (SMED), is in the business of collecting and disposing of that waste, and a range of other dangerous potential contaminants. Based on the company’s latest earnings report, that business is booming, creating the potential for a short-term breakout in SMED’s share price.

Sharps’ solutions cover the proper treatment of numerous types of items, including hypodermic needles, lancets and other devices or objects used to puncture or lacerate the skin, in addition to and unused consumer dispensed prescription and over-the-counter drugs and medications. The company serves customers in multiple markets such as home health care, retail clinics and immunizing pharmacies, pharmaceutical manufacturers, professional offices (physicians, dentists and veterinarians), hospitality (assisted living facilities, hotels, motels and restaurants), and government agencies at the federal, state and local levels.

While it’s certainly not the sexiest business, someone’s got to do it, and judging from the company’s very nice Q1 earnings report, Sharps business is growing at an impressive clip. The numbers speak for themselves. Revenue in the first quarter of fiscal 2014 was $6.3 million, up $1.1 million, or 21.7%, over revenue in the fiscal 2013 first quarter of $5.2 million. Net income for the fiscal 2014 first quarter was $0.1 million, or $0.01 per diluted share, compared with a net loss of $0.6 million, or ($0.04) per diluted share, for the corresponding prior-year period.

Customer billings, the company’s measure for performance and progress of the business, increased $1.3 million, or 23.6%, to $6.7 million compared with the prior-year period, driven by solid growth in billings to the Retail, Professional and Home Health Care markets. These were offset by lower billings to the Core Government market, as last year’s first quarter benefitted from a $0.2 million stocking order placed by the US Department of Defense. On a sequential basis, customer billings increased $1.7 million, or 32.7%, compared with $5.1 million in the trailing fourth quarter of fiscal 2013. Significant growth over the trailing quarter was realized in the Retail and Professional markets.

The market response to this report was to push SMED shares to a new 52-week high of $3.74 in mid-day trading on a day when the big three index averages were facing strong headwinds, with the majority of small-cap issues trading to the downside. Volume was notable, with over 200,000 shares changing hands by midday, compared to a recent 3-month daily trading average of 27,000. Prior to today, SMED’s 52-week trading range was $2.01 – $3.50, with the bottom put in on January 3.

Technically, from a trading perspective, the stock’s one-year base formation in SMED shares is exactly what you want to see when looking for an issue with breakout potential. For most of 2013 SMED hugged the $2.60, with an occasional short-lived burst north, always bumping up against $3 resistance. Prior to the end of September SMED jumped above that level only once, ramming into a secondary wall of selling at $3.20. By the beginning of summer, however, shares once again worked their way through $3 and gradually began to challenge the $3.20 level prior to Tuesday’s earnings release.

SMED chart

It may be a disincentive to take a chance on shares of an issue that has just cracked new 52s and may simply be a vehicle for momentum traders to cash out short-term profits. The flip side, of course, is that the “blue skies” of subsequent new 52 week highs remain well within reach, and may continue to fall based on the strength of the company’s bottom line and future prospects. Also bullish is the long period of consolidation at lower levels, which is a key characteristic of most breakout charts. That’s not to say that shareholders won’t cash out for nice profits along the way, temporarily “shaking” SMED’s price lower. But that kind of natural consolidation can also serve as a springboard for higher prices.

Also keep in mind that Smarts business isn’t prone to be too greatly affected by macroeconomic forces. People will always need health care and there will always be a related trail of waste products that require disposal. As long as Smarts Compliance can continue to execute and grow its business the way it has been, I expect to see a steadily higher share price for SMED—with the potential for a quick run to new 52s in the days ahead.

Good luck with this and all of your trades!

Warren Gates
Senior Analyst
Normandy Research

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