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: Armstrong Flooring Inc. (NYSE: AFI)
Today’s penny stock pick is the resilient floor covering manufacturing company, Armstrong Flooring Inc. (NYSE: AFI).
Armstrong Flooring Inc., together with its subsidiaries, designs, manufactures, sources, and sells resilient flooring products in North America and the Pacific Rim.
Its products are used in the construction and renovation of commercial, residential, and institutional buildings. The company sells its products to independent wholesale flooring distributors, retailers, builders, contractors, installers, property management firms, homeowners, and others.
Website: www.armstrongflooring.com
Latest 10-k report: https://sec.report/Document/0001655075-21-000005/
Analyst Consensus: Not covered by analysts.
Potential Catalysts / Reasons for the Hype:
- The company announced that it has put itself up for sale. AFI reports that it has hired Houlihan Lokey Capital Inc. to assist with a process for the sale of the company and with the consideration of other strategic options.
- AFI also secured $35 million in term loans from its lenders to pursue its operational and strategic goals. The new loan facility is available through June.
- Hedge Funds Increased Holdings by 245.5K Shares Last Quarter.
AFI – Hedge Funds | 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 has been forming a falling wedge pattern for the past several months. 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 from the falling wedge pattern. Once the stock breaks out of the falling wedge pattern, it could move higher.
AFI – Daily Chart
#2 Bullish ADX and DI: The ADX indicator shows bullishness as the +DI line is above the -DI line, and the ADX line is currently moving higher from below the +DI and -DI lines.
#3 Price above MA: The stock is currently above its 50-day SMA, indicating that the bulls have currently gained control.
#4 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.
#5 Above Support Area: The weekly chart shows that the stock is currently trading above a support area, which is marked as a pink color dotted line. This is a possible bullish indication.
AFI – Weekly Chart
#7 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart, and is also moving higher from oversold levels, indicating possible bullishness.
#8 MACD above Signal Line: In the weekly chart as well, the MACD (light blue color) is currently above the MACD signal line (orange color). 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 AFI is above the price of $2.80.
Target Prices: Our first target is $3.70. If it closes above that level, the second target price is $5.00.
Stop Loss: To limit risk, place a stop loss at $2.20. Note that the stop loss is on a closing basis.
Our target potential upside is 32% to 79%.
For a risk of $0.60, our first target reward is $0.90, and the second target reward is $2.20. 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 for the past several years and negative cash flows from operations beginning in 2019.
AFI – Consolidated Statements of Operations
- On November 15, 2019, a shareholder filed a putative class action complaint in the United States District Court for the Central District of California alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, based on alleged false and/or misleading statements or omissions made between March 6, 2018 and November 4, 2019. A settlement agreement had to be reached, for a payment of $3.75 million.
- Despite being a loss-making company, the executives are being paid significant compensation.
AFI – Executive Compensation
- The company has significant debt.
AFI – Consolidated Balance Sheet
- The company had previously sold its L.A. land for $65.4 million, but was not able to take advantage of it to create a nearly debt-free balance sheet, or vastly increase liquidity. Instead of a turnaround, Armstrong posted lackluster operating results during the first three quarters of FY 2021, and announced they amended its asset-based loan (ABL)/Term Loan to resolve the covenant violation, and borrowed an additional $35 million.
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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