2023-07-19 18:56:44 ET
Summary
- We maintain a 'hold' rating for Acacia Research Corporation's stock due to a lack of sustained profitability, leading to a 14% decrease in share price since last year.
- Despite a brief rally in 2020, Acacia's shares have once again entered bear-market territory, with long-term averages indicating potentially lower prices.
- The company's technicals suggest a significant upward move is not imminent, with Q2 earnings in early August expected to provide further insight.
Intro
We wrote about Acacia Research Corporation ( ACTG ) back in July of last year when we were attracted by the company's war chest of cash (which was to be put to use for upcoming acquisitions) as well as the stock's keen valuation on offer. Furthermore, we could see that Acacia Research (being a company acquirer) was developing a proven track record with its purchases which is obviously crucial from an investor's standpoint.
However, we designated a 'Hold' rating on the stock at the time because the technical chart (which is essentially the market) was not demonstrating the bullish fundamentals we were seeing concerning forward-looking investment. In fact, shares find themselves down almost 14% since our commentary last year whereas the S&P500 has rallied over 15% in the same time frame. Suffice it to say, an investment in Acacia Research over the past 12 months represented a sizable opportunity cost especially given how inflation has remained elevated in the interim period.
Therefore, we will continue to let the technicals guide us in this play irrespective of how bullish the fundamentals may be. In fact, it is worth remembering that the technicals have already absorbed every piece of information that is known about Acacia at this point (Ramifications of how the Starboard situation will play itself out, Printronix potential, valuations, etc.) so let's see if we can gain insights on where we believe shares of Acacia will trade going forward.
Long-Term 20-Year Chart
If we pull up a long-term chart of Acacia, we see two areas of which investors should be fully aware. Firstly, the concept of trend and the premise that stocks do indeed undergo trending moves which many times endure for many years (such as Acacia's rally from 2008 to 2011). Now in 2020, shares of Acacia managed to rally out of heavy oversold levels which resulted in a bullish trend-line break as well as a crossover of the stock's 10-month moving average above the corresponding 40-month average (Return to bull market). There is no doubt that investors were looking for a similar-type-2008 multi-year rally here but unfortunately, the rally came to a grinding halt in early 2021. Since then, shares have once more entered bear-market territory as we see from the bearish crossover of Acacia's long-term moving averages.
Secondly, the risk here for long-term investors is that if one is caught on the wrong side of the trade (paper loss), history has shown that multi-decade returns have been poor at best. Remember, technical analysis is very much related to the study of investor psychology. Suffice it to say, although shares are trading above their multi-decade lows at present, investors did not have a problem in past times leaving shares to fall further . Therefore, given the bearish crossover of Acacia's long-term averages alluded to above, investors need to be prepared for potentially lower prices here.
Intermediate 5-Year Chart
When we go to the intermediate chart, we can see how Acacia's descent has unfolded since early 2021. One could make the argument that a symmetrical triangle is playing itself out here (which would be a bullish pattern) but the shallowness of that underside trend-line makes the pattern appear more like a bearish triangle over anything else.
Irrespective, given the pattern of lower highs and consolidation over the past 18+ months or so, we believe shares are on course to test underside support in upcoming weeks. We see this from the 14-week stochastics indicator which demonstrates that shares are once more on their way to test near-term oversold conditions. Oscillators are invaluable technical tools in times of chopping trading which we have had in ACTG for quite some time now.
Daily 12-Month Chart
If we pull a 12-month chart, it is evident that the RSI bearish divergence as well as the sizable increase in selling volume last month are pointing towards lower prices here over the near-term. Moreover, although sales have tacked on over 7% over the past two weeks or so, strong buying volume has not been there to accompany the rally. Therefore, shares could easily test the $3.60 to $3.70 level in upcoming sessions, but the real risk remains a test of the stock's 2020 lows over time.
Conclusion
Therefore, to sum up, we are maintaining our 'Hold' rating in Acacia Research Corporation as the stock's technicals continue to demonstrate that a significant upward move is still not on the cards. Let's see what Q2 earnings bring in early August. We look forward to continued coverage.
For further details see:
Acacia Research: Shares Remain Under Pressure (Technical Analysis)