American Power Conversion designed and manufactured uninterruptible power supply products for use in personal computers, workstations, file servers, communications equipment and other electronic devices.
In the case of power failure, its products provided a temporary and immediate source of power until back-up or emergency systems could take over. This would safeguard equipment and data from potential damage and loss.
American Power benefited from the rapid growth in the computer industry and government defense business. At its first buy point, annual earnings had been nearly doubling for three years. Starting at 4 cents a share, it went to 7 cents, then 16 cents and on to 30 cents.
In the two quarters before that first buy point, earnings jumped 125% and 83%. Sales were up 120% and 86%. Annual pretax margins were at 26.9%, return on equity was 50.7%, and sales were up more than 100%. All of this happened before the stock made its huge run.
Notice how a stock's base pattern forms because of the general market. The line above the stock's weekly prices is the S&P 500. Once the S&P hits a bottom and begins an uptrend, stocks will break out of sound bases.
American Power Conversion: Stock Soars 800%
The depth of a stock's correction in most cases becomes affected by the degree of decline in the market index. The first 18-week cup-with-handle base was classic. After rounding out along the bottom of the cup, it ran up five weeks in a row with volume. It then pulled back two weeks on lower volume to form a handle in the upper part of the base.
The next week it broke out on March 7 with the day's volume at 410% above its daily average. The stock then increased more than 800%.
The depth of the eight-week flat base that broke out in October 1991 was less than the decline in the first two base patterns in our example due to the greater declines in the S&P 500.
Don't ever get thoroughly discouraged with investing when the general market is in a correction. That's the process that creates bases for the next big market leaders. So learn your general market rules and your individual stock buy and sell rules to be in phase with what's happening.
This column originally ran in Investor's Business Daily as part of a 2012-14 series on America's greatest stock opportunities written by IBD's founder, the late William J. O'Neil. See more stories in this series.
