DIGI may touch RM37.00 in the current run-up

One of the better performing blue chip stocks for the past 10 months is DIGI. From the monthly chart below, we can see that this stock tends to consolidate in the form of a saucer that lasts for years. A breakout of the saucer formation is followed by a strong rally lasting many months.

I have overlaid on the chart the 3 saucer formations; the upside breakout; and the ensuing rally. The stock broke above its latest saucer formation at the beginning of the year. Its previous 2 breakouts were followed by extended rallies which were equivalent to 2.5-3.0 times the depth of the saucer formation. If the current rally can record a gain of just 2 times the depth of the last saucer, it could hit a high of RM37.00. Notice that the first upleg in 1999-2000 was equivalent to 3 times the depth of the preceding saucer (of RM2.00) while the second upleg in 2006-2007 was equivalent to 2.5 times the depth of the preceding saucer (of RM7.00). Thus, I assume that the current upleg will have an extension of 2.0 times the depth of the preceding saucer (of RM5.00).


Chart: DIGI's monthly chart as at Nov 1, 2011 (Source: Tradesignum)

Note: DIGI recorded a net profit of RM860 million on a turnover of RM4.418 billion for 9-month ended 30/9/2011. The 9-month EPS is 110.6 sen. Thus, its full-year EPS would be about 147.5 sen. At the close of RM35.40 this morning, DIGI is trading at a PE of 24 times. Fundamentally, the stock is deemed fully valued.