Investor's Corner: Some Initial Bases Shorter Than Normal

A base pattern needs at least several weeks to develop, but new issues sometimes form short bases that lead to prodigious results.

Many stocks' successful initial bases have been as short as three or four weeks.

Under normal circumstances, you'd look for base patterns to build over seven weeks or longer. Flat bases can be as short as five weeks.

Shorter patterns are much more commonly associated with failed breakouts. So why the exception for IPOs?

Because when a company with heavy investor demand goes public, it can run up quickly. Its first correction may not take long.

Remember, a base serves to frustrate weak holders, leaving the stock in the hands of investors with firmer convictions about it.

In an IPO, few shareholders need to be shaken out since most investors are brand-new holders.

It's still best to avoid buying an IPO just after it goes public. Let the stock develop some degree of trading history and wait for it to form its first base. Just be aware that first base could be pretty short.

IPOs have some risks not shared by established stocks, though.

If the general market stumbles into a correction, it's often the new issues that pull back the hardest.

Also, IPOs tend to be more volatile -- something that can bring a stock down as fast as it rallies.

Because of these added risks, examine any initial base carefully. If you don't consider yourself an apt stock analyzer, it may be better to focus on established stocks.

Just like you'd do with any stock, look for signs of strength.

In a new issue, it's important to see ample liquidity. Thinly traded issues, even those that have been trading for years, have several drawbacks. For example, institutional investors shy away from stocks whose small float would limit their ability to trade in and out of it easily.

Look for some accumulation in the base, meaning gains on higher volume and little if any selling on strong trading.

Check if the stock finds support at its 50-day moving average, if the stock has traded long enough to have one.

Of course, any new issue should have outstanding earnings and sales growth, and other solid fundamentals. Often with new issues, companies have an innovative product or service that draws heavy investor interest.

One difference with IPO bases is that they usually don't have a 20% prior uptrend, like you'd want in other stocks.

Trina Solar TSL went public Dec. 19 at 18.50 a share. The Chinese manufacturer of solar power modules formed an initial base of about four weeks (point 1).

The proper buy point was 26.85 or 10 cents above the highest price it had recorded (point 2).

Daily volume was running about 300,000 to 650,000 shares as the stock neared its breakout.

Trina's EPS gains were 133% and 700% for the two quarters before the Jan. 26 breakout. Sales growth was 490% and 472%. Return on equity in 2005 was 33%.