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Teradata Corp. (TDC)

“Picture a closet filled to the brim with your belongings. Now imagine finding a pair of shoes stuffed way at the back. Digging through the piles to get your shoes seems a daunting task. If only there was an easier way to organize and store everything... In the electronic world there is— it’s called a data warehouse, a technology that manages vast amounts of electronic information. Businesses that help other companies effectively manage and store data have become hot commodities.

“A bidding war recently erupted between Hewlett-Packard (NYSE: HPQ) and Dell (Nasdaq: DELL) over data storage company 3PAR (NYSE: PAR). During the bidding process, 3PAR’s stock price more than tripled, going from around $10 to $30 in just a few weeks! Ultimately, HP managed to win the battle, but the data storage war itself has not been won. On Monday IBM (NYSE: IBM) announced a $1.7 billion acquisition of data specialist Netezza (NYSE NZ), a data warehousing company that enables fast and complex information queries. News of the Netezza acquisition sent the stock flying, sparking buying interest in the overall data warehousing sector. With the sector quickly consolidating, analysts and traders alike are speculating who the next takeover target will be. Could it be $6.5 billion Teradata Corp. (TDC 39.76 NYSE)?

“Teradata is the world’s largest data warehousing and enterprise analytics company. It has a stable customer base, shows strong growth potential and is continuing to develop new data technologies. Providing data storage and analytics—to optimize and decode information—for customers such as Coca Cola (NYSE: CCE), Apple (Nasdaq: AAPL), and eBay (Nasdaq: EBAY), TDC occupies an important place in the data warehouse market—one that many other companies may want a piece of.

“Even if TDC is not a takeover target, the stock is showing strong momentum. It bullishly broke an intermediate downtrend line off its June $34.61 high—a level the stock stalled at three times this summer. Piercing its upper Bollinger band last week, the stock hit an all-time high of $38.57. With no overhead resistance in sight, TDC could rise quickly; the upper channel line projects an initial price target of around $45. TDC is currently well above both the rising 10- and 30-week moving averages, which intersect at $33.23 and $31.53, respectively.

“The indicators are mostly bullish. In late August, MACD gave a buy signal. The MACD histogram is in positive territory and rising. Since the stock became highly overbought in August 2009, RSI has been in a downtrend. However, it now appears this downtrend line is on the verge of being broken. At 68.9 and rising, RSI [its relative strength index] has surpassed the key 50 juncture, but is not yet highly overbought. Stochastics, which shows the stock is overbought, has not yet given a sell signal. Strong stocks can become and stay overbought for long periods.

“Fundamentally, Teradata shows solid growth potential. In early August, the company announced better-than-expected second-quarter results. Achieving one of the best quarters in its history, revenue for the period rose 12% from a year earlier to $470 million. Analysts expected revenue of $463.7 million. Growth was driven by a record number of new clients using Teradata’s technology. Given the upbeat second- quarter, TDC raised its full-year revenue guidance by 8% to 10%. The company now expects sales of around $1.9 billion, marking an expected 10.3% increase, compared with revenue of $1.7 billion in the 2009 year. With increasing demand for Teradata’s technology, analysts expect 2011 revenue to climb an additional 8.6%, to $2.1 billion.

“The earnings outlook is equally optimistic. For the most recent second quarter, analysts expected the company to earn $0.40 per share. Instead, earnings increased 22% to $0.44, compared with $0.36 in the year-ago period. An increase in new clients drove growth. Given the strong quarter, the company raised its full-year earnings guidance to the $1.69-$1.79 range. This projection represents at least a 14% increase from $1.48 in the 2009 year. ...

“Although Teradata is richly valued, the company has a solid balance sheet with $724 million in cash and no long-term debt. As a result, TDC has the financial flexibility to continue focusing on researching and developing new data solutions. Given that Teradata has a solid fundamental growth outlook and strong technicals, I plan to go long on this data company. To help ensure I don’t get trapped in a false breakout, I am placing a buy-on-stop order [good until Friday, October 15] at $38.76, just above Friday’s high. This means if TDC does not again hit or rise above this price, I will not enter the position. My stop-loss is $33.06, near the current intersection of the 10-week moving average. Based on the upper channel line, my target is $44.97. The risk/reward ratio is 1.08:1.”

Dr. Melvin Pasternak, Double-Digit Trading

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.