We recently started a series called “Penny Stock of the Day”. These ideas are geared for traders with an extremely high risk appetite.
Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.
Penny Stock of the Day: ARC Document Solutions Inc. (NYSE: ARC)
Today’s penny stock pick is the global document solutions provider, ARC Document Solutions Inc. (NYSE: ARC)
ARC Document Solutions Inc. is a reprographics company that provides document solutions. The company’s service offerings include managed print services (MPS), offsite services, archive and information management ( AIM), specialized color printing, Web-based document management applications, and equipment and supplies sales.
Its product application involves several industries such as architecture, engineering, and construction. It principally engages in providing an onsite service to install a complete document solution platform in its customers’ offices and project sites operate offsite service centers and enable its customers to store information and intellectual property in a cloud-based and searchable digital archive.
Website: www.e-arc.com
Latest 10-k report: https://sec.report/Document/0001305168-21-000020/
Analyst Consensus: Not covered by analysts
Potential Catalysts / Reasons for the Hype:
- Encouraging Q2 results, with growth in sales and the improvements in gross margin, EPS, and adjusted EBITDA.
- The company insiders buying the stock. President and CEO Kumarakulasingam Suriyakumar had purchased shares worth $142,892 during the past month.
ARC – Insider Buying
- The company is profitable, a dividend stock, and having a shrinking public float.
- Rumors of a possible buyout.
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Breakout From Consolidation Area: The chart shows that the stock was trading within a consolidation area for the past several days. This is marked in the daily chart as a purple color rectangle. Currently, the stock has broken out of this consolidation area with a high volume. Once a stock breaks out from a consolidation area, it usually moves higher.
ARC – Daily Chart
#2 Bullish ADX and DI: The ADX indicator shows bullishness as the +DI line and the ADX line are above the -DI line, and the ADX line has started to move higher from below the +DI and -DI lines.
#3 Price above MAs: The stock is currently above both 50-day as well as 200-day SMA, indicating that the bulls have currently gained control.
#4 Bullish Aroon: The value of Aroon Up (orange line) is above 70 while Aroon Down (blue line) is below 30. This indicates possible bullishness.
#5 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
#6 Flag Pattern Breakout: As seen from the weekly chart, the stock was in a strong uptrend after which it started consolidating and was in a narrowing range. This is a classic flag pattern and is marked in the chart in pink color. A flag is a continuation pattern. Whenever a stock breaks out of this pattern, it typically continues its previous trend (uptrend in this case). Currently, the stock has broken out of the flag pattern. This is a possible sign of an upcoming bullish move.
ARC – Weekly Chart
#7 Bullish MACD: The MACD (light blue color) is currently above the MACD signal line (orange color) in the weekly chart as well, indicating possible bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for ARC is in two scenarios:
- If it closes above the price of $3.30.
- If it corrects to the price of $2.55.
Target Prices: Our target prices are $4.50 and $5.50.
Stop Loss: To limit risk, place a stop loss at $1.50 (for entry near $2.55) and $2.60 (for entry near $3.30). Note that the stop loss is on a closing basis.
Our target potential upside is 36% to 116%.
- Entry near $2.55: For a risk of $1.05, our first target reward is $1.95, and the second target reward is $2.95. This is a nearly 1:2 and 1:3 risk-reward trade.
- Entry near $3.30: For a risk of $0.70, our first target reward is $1.20, and the second target reward is $2.20. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Potential Risks / Red Flags:
- In April 2020, the company was notified by the New York Stock Exchange (NYSE) that the average closing price of the Company’s shares of common stock had fallen below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price for continued listing on the NYSE.
- The company’s net sales in 2020 decreased 24.3%, compared to 2019.
ARC – Net Sales
- ARC is highly dependent on the architectural, engineering, construction, and building owner/operator (AEC/O) industry and any decline in that industry could adversely affect the company’s future revenue and profitability. The company also has geographical risk, as it had derived approximately 32% of net sales in 2020 from its operations in California.
- The company executives are drawing significant compensation.
ARC – Executive Compensation
- The company is being investigated for a potential breach of fiduciary duty claim involving the board of directors of ARC Document Solutions, Inc.
- The stock has been a low-volume stock historically. Therefore, many technical analysis indicators may not work well, and their support can be as thin as resistance.
As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!
Happy Trading!
— Trades of the Day Research Team
READ BEFORE TRADING PENNY STOCKS: The allure of penny stocks lies in their potential to deliver massive gains in a short period of time. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.
Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment. Nevertheless, we do our best to identify short-term trade opportunities in this exciting space because we know some of our readers are looking for high-risk, high-reward ideas. We just urge you to make sure you fully understand the risks before making any of these trades.
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