PeopleSoft was the leader in software for human resource management. It came public in November 1992 at 17 and closed the week at 28.
Eleven weeks later, it hit 40 during an uptrend in the general market. But in the next three weeks, it dropped 40% and began a 17-month whipsaw period where it built three bases.
The first two were faulty and failed. The first base, labeled A in the insert at the lower right of the chart, was wide and loose, and failed when it tried to break out. The second, at B, had a handle in the lower half of the base. It failed to make a new high as the S&P 500 had started a market correction.
The reason I'm showing bases A, B and C in the insert is I want everyone to recognize a phenomenon that I've seen happen several times. It clearly explains why you need to become a good chart reader who can tell the difference between a faulty pattern that will fail, and the same stock that later on will suddenly form a classic cup with handle that, in some cases, can go up 10 or 20 times.
PeopleSoft: The Correct Cup With Handle
The base labeled C in the insert is the same correct cup-with-handle base labeled C at the left hand side of the chart that shows an overall price increase of 10 times. The first base is wrong and fails, and the second one is wrong and fails.
But the third one is precisely right and goes up 10 times. You can and must learn to recognize the difference.
Qualcomm did the exact same thing four years later from February 1997 to January 2000. Two faulty bases failed while the third was a classic cup with handle. It soared 20 times from the first quarter of 1999 to its peak the first week of 2000.
At the initial proper buy point, PeopleSoft reported 163% annual earnings growth the prior year. The last two quarters of earnings were up 56% and 60%. Sales were up 100% and 87%, pretax margin climbed 23.5%, and research and development comprised 14% of sales.
Editor's Note: Founded in 1987, PeopleSoft was headquartered in Pleasanton, Calif. It was acquired in 2005 by Oracle, which now markets the PeopleSoft brand.
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.
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