Investor Education: OmniVision Breakout Came When Market Started New Uptrend

The pioneer of single-chip technology made its debut in July 2000 and promptly skidded the next year, along with the Nasdaq composite.

But it bounced back and started forming a base in late 2002. Investors likely first noticed the stock as it broke out in March 2003. By then, IBD had featured the stock twice in the New America section: in August 2000 and December 2002.

OmniVision (NasdaqGS: - ) also may have alturned up in computer screens of top-performing stocks. In either case, a little research would have uncovered an unknown gem with the potential to run up to big gains.

The Sunnyvale, Calif.-based company's chips were gaining traction among digital camera and camera/cell phone makers.

Growth Soared

Earnings surged 600%, 250%, 999% and 1,700% in the four quarters before the March 2003 breakout. The numbers were huge, but compared with paltry profit of 1 or 2 cents the prior year. The 999% growth was vs. a loss in the same year-ago period. Still, OmniVision finally was posting solid profit.

Sales growth stepped up as well, rising 40%, 50%, 77% and 206% in the four quarters ahead of the breakout. After-tax profit margins grew to 15.1% in the most recent quarter, from 3.3% in the year-ago period.

The stock boasted mostly solid ratings when it broke out: an 80 Earnings Per Share Rating and a Relative Price Strength Rating of 81. Its C+ Accumulation/Distribution Rating was acceptable. Mutual funds held 35% of the float.

OmniVision fell 35% from the left peak to bottom of the base, which formed on top of another base it had cleared in November (point 1). Base-on-base patterns can surge to big gains, especially after a bear market ends.

The stock shaped the left side of its base in three waves (point 2), giving time to shake out the weak holders.

A potential investor watching the stock on a weekly chart should have noticed volume drying up along the bottom of the base (point 3), a constructive sign. Rising volume as the right side built indicated growing interest by the smart money.

After shaping a seven-day handle, the stock broke out March 13, 2003, on triple normal trade (point 4).

The Nasdaq surged 4.8% on heavy volume that session, the second day of an attempted rally. It followed through two days later.

Two other leading stocks, Schnitzer Steel (NasdaqGS: - ) and Coach (NYSE: - ), already had broken out. Most others broke out during the first three weeks after the follow-through.

On June 12, OmniVision reported profit that topped Wall Street views by 6 cents, but shares sold off (point 5).

The next day, the chipmaker announced a follow-on offering of shares, which tends to temporarily pressure a stock's price.

But it soon found support at its 10-week moving average. When OmniVision next reported earnings Aug. 21, it beat views by 3 cents. The stock again fell (point 6) but quickly recovered to resume its uptrend.

The Top

On Oct. 29, the chipmaker raised its guidance, sending shares up more than 22% for the session (point 7).

Nice price spike, but the action flashed a warning. It was the biggest weekly point 16read from the low to the high of the whole advance. That often occurs near the top, and was the case with OmniVision. If you sold there, the gain from the March 13 breakout would have been 197%.

The stock ran up above 33 in December '03, then fell as much as 73%. It wouldn't revisit its old high until May '06.