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: Red Cat Holdings Inc. (NASDAQ: RCAT)
Today’s penny stock pick is the drone company, Red Cat Holdings Inc. (NASDAQ: RCAT).
Red Cat Holdings Inc. provides products, services, and solutions to the drone industry. The company offers First Person View (FPV) video goggles to the drone industry. It also sells FPV drones and equipment, primarily to the consumer marketplace through its digital storefront located at rotorriot.com.
In addition, the company offers software and hardware solutions that enable drones to complete inspection services in locations where GPS is not available. Further, it is developing a Software-as-a-Solution platform to provide drone flight data analytics and storage, as well as diagnostic products and services.
Website: www.redcatpropware.com
Latest 10-k report: https://sec.report/Document/0001554795-21-000273/
Analyst Consensus: Not covered by analysts
Potential Catalysts / Reasons for the Hype:
- The company was awarded a five-year customs and border protection contract worth US$90 million. As part of the blanket purchase agreement (BPA), Red Cat subsidiary Teal Drones will supply unmanned aircraft systems (UAS) and other customs and border patrol equipment.
- RCAT stock reported earnings this week with huge revenue growth. The quarter also marked the sixth consecutive quarter of revenue growth for Red Cat.
- Corporate Insiders Bought Shares Worth $278.0K in the Last 3 Months.
Insiders | Source: TipRanks.com
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Falling Wedge Pattern Breakout: The daily chart shows that the stock was forming a falling wedge pattern for the past several weeks. These are marked as purple color lines. It has typically taken support at the bottom of the wedge before bouncing back. The stock has currently broken out of the falling wedge pattern with high volume, indicating possible bullishness.
RCAT – 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 Bullish RSI: The RSI is above 50 and moving higher in the daily chart, indicating the strength of the current upmove.
#4 Bullish Stoch: The %K line of the stochastic is above the %D line and is currently moving up from oversold levels. This indicates a possible bullish setup.
#5 Support Near Breakout Level of Consolidation Area: The weekly chart shows that the stock had taken support near the breakout level of the consolidation area (marked as a pink color rectangle) before moving higher. This is a possible bullish indication.
RCAT – Weekly Chart
#6 Bullish Stoch: In the weekly chart as well, the %K line of the stochastic is above the %D line and is currently moving up from oversold levels. This indicates a possible bullish setup.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for RCAT is above the price of around $2.75.
Target Prices: Our target prices are $3.80 and $5.00.
Stop Loss: To limit risk, place a stop loss at $2.15. Note that the stop loss is on a closing basis.
Our target potential upside is 38% to 82%.
For a risk of $0.60, our first target reward is $1.05, and the second target reward is $2.25. This is a nearly 1:2 and 1:4 risk-reward trade.
In other words, this trade offers 2x to 4x more potential upside than downside.
Potential Risks / Red Flags:
- The company has incurred net losses since its inception. RCAT has accumulated net losses of approximately $15,800,000 as of April 30, 2021.
RCAT – Consolidated Statements Of Operations and Net Loss
- The company faces stiff competition from larger companies that have substantially greater resources. This includes transportation companies like United Parcel Service, Federal Express, and Amazon, and defense companies such as Lockheed Martin Corporation, and Northrop Grumman Corporation.
- Despite being a loss-making company, the executives are being paid significant compensation.
RCAT – Executive Compensation
- It may be noted that there are five companies sharing the $90 million contract. RCAT is just one of the five contractors.
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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