A breakout into ‘blue-sky’ territory refers to the moment a stock breaks clear of its previous high. The effects of such a breakout can be powerful, because it essentially means there’s no more resistance holding the stock back.
For example, if a stock has previously traded at 300p and falls to 200p, there’ll be a considerable number of investors sitting on an unrealised loss. Behavioural finance dictates that if the stock begins rising again, many of these investors will sell out, happy just to break-even, and the effect is that this selling creates a drag on the upwards momentum. However, once the share price has broken clear of all previous highs, the resistance is gone and it’s common to see the share price power upwards at this point.
With that in mind, here’s a look at two stocks that are approaching blue-sky territory.
Shares in identity specialist GB Group (LSE: GBG) have endured a roller-coaster seven months. Back in September the shares touched a high of 357p; however, a trading update in October saw the shares plummet back to just above the 200p level in a dramatic fall.
At the time, I suggested “the share price fall may have created an opportunity to pick up this fast-growing at a more attractive price” and in hindsight I was spot on, as the stock has since motored upwards to now trade above 340p, a whisker from its all-time high.
So where to from here? Can GB Group power past its previous high into blue-sky territory or is it time for a pull-back?
The company recently updated the market on its trading performance for the year to 31 March and the results were excellent. GB Group expects to generate revenue growth of 19% for the year, including 12% organic growth, and also stated that it expects to report an adjusted operating profit of £17m, a 27% increase on last year and ahead of market expectations.
On the back of these results, it appears that GB Group has its momentum back and thus I wouldn’t be surprised to see the share price continue to march higher from here. Having said that, on a forward looking P/E ratio of over 35 and an enterprise value (EV) to sales ratio of approximately five, the stock is now once again priced for perfection and therefore an element of caution may be wise.
Cloud communications software specialist IMImobile (LSE: IMO) is one step ahead of GB Group, breaking out into blue-sky territory earlier this week after clearing its previous high 197p set back in August.
Having fallen to 156p late last year, the stock has put in a fantastic performance in 2017, rising nearly 30%, and after surpassing its previous high, there’s now no resistance holding IMImobile back.
The company’s financial track record is impressive, with revenue growing from £43.4m in FY2014 to £61.6m last year. Analysts expect a revenue increase of 17% for FY2017 and on a forward looking P/E ratio of 19.3 and a EV to sales ratio of 1.1, the company doesn’t look overly expensive to my mind. After announcing both the acquisition of Infracast Limited and an agreement with mobile operator Telenor in the last two months, it appears that IMImobile has considerable momentum at present and as a result I believe there’s a chance the stock could continue trending upwards from here.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.