Special Cash Dividend

I am going to highlight a trade that is not in my regular basket of stock trading strategies. As a matter of fact, I am not going to even trade this strategy with real money. This will be a paper trade to determine the possibility of using this strategy in the future.

I found a news announcement for Comarco Inc (CMRO) regarding a special cash dividend to be paid to the stock holders. Dividends are pretty common things for stock investors to look for. What makes this dividend special is that the company will be paying a full $1.00 per share.

The stock was in a basing pattern at the $8.00 area and gapped up and ran to $9.00 after the announcement. Even at $9.00 the dividend represents a 11% yield. To get this dividend, you must own shares of CMRO stock on April 5th. It is very likely that CMRO will gap back down to the $8.00 price range once the dividend has been pocketed by investors.

My theory is that the pullback to $8.00 will only be temporary seeing the new price level of $9.00. Please remember that this is only my theory and I will be following this stock as a paper trade only.

The stock price has the potential to run up to $10.00 with the nearer term resistance or as high as $12.00 with the longer term resistance. This stock could be played in two different strategies. (1) Buy the stock before April 5th, receive the special cash dividend, then wait for the stock price to return to break even. (2) wait for the stock price to gap down after the dividend an pick up some stock at the discounted price.

I see a couple flaws with the strategy: First, the stock is not fundamentally strong and may not support an uptrend to previous areas of resistance; Second, CMRO will be announcing earning in the near future which is always unpredictable on the stock prices. There are obviously some risks involved with this trade as with any trade.

The reason that I am interested in this trade is that the special cash dividend has increased the visibility of CMRO in the market and an increased visibility could bring new buyers into the stock. New buyers mean higher demand which will bring higher stock prices. If the company is able to make such a large dividend payment, the earnings must be able to support the company into the future without all the extra cash. I would expect a good earnings report.

So what is the trade? I will be placing a paper trade to buy CMRO stock at a price of $9.00 or better. I will then hold my stock through the April 5th ex-dividend date and pocket the dividend. After the expected gap down, I will place a tight stop to protect myself from a continued drop in price.

Now, Let's all see how this plays out.