• 27 Sep
    Semiconductors are struggling, but this small-cap stock could be a Diamond in the Rough

    Semiconductors are struggling, but this small-cap stock could be a Diamond in the Rough

    The semiconductor industry has been one of the interesting segments of the Technology sector to watch for a few years now. Since 2016, the industry as measured by the iShares Semiconductor ETF (SOXX) has outpaced the rest of the broad stock market by a wide margin, increasing in value by more than 140%; by comparison, the S&P 500 increased by 60% over the same time period. Since hitting an all-time high in mid-March, however, the industry has stagnated, falling almost 8% as of this writing from that peak. More →

  • 18 Sep
    MU could be the best bargain in the stock market right now – but be careful!

    MU could be the best bargain in the stock market right now – but be careful!

    Over the last month or so, market fears and uncertainty have centered primarily around global trade. In July and August, one of the most affected pockets of the economy was the tech sector, with particular bearishness bearing down on semiconductor stocks. As measured by the iShares Semiconductor ETF (SOXX), that industry is down about 5.5% since peaking in early June. More →

  • 21 Aug
    MCHP’s debt just quadrupled. The why means this stock is a scary risk

    MCHP’s debt just quadrupled. The why means this stock is a scary risk

    The semiconductor sector has been one of the most interesting sectors of the market to pay attention for the last couple of months; after unquestionably beating the market for most of the the year, the sector has been battered since June by ongoing U.S. – China trade tensions. That’s put a lot of interested investors on edge, and for some that means that semi stocks should be kept at arm’s length. For me, seeing a sector under pressure usually makes me start paying attention to as many of the most fundamentally sound stocks in the sector that I can. It also means, however that the sector could stay under pressure; and in the case of semiconductors, that pressure could continue for some time. That means that you have to be very selective about the stocks you choose to follow, and you have to be willing to let a lot of others simply pass you by.

    The fact is there are some semiconductor stocks that I think are pretty significantly undervalued right now, and that I think present some pretty good opportunities even if tariff-related volatility continues to work against the sector. MU and AMAT are two examples I’ve written about before, and that are already at extremely depressed price levels that I think represent some really impressive value propositions and are worth paying attention to. There is another major player in the industry that has also been beaten down pretty sharply, but that I think presents a higher level of risk to investors, at least for the foreseeable future, than most of the other big names represent.

    Microchip Technology (MCHP) is a company that, until their last earnings report, which was released just a little over a week ago, had an excellent fundamental profile, and a sparkling balance sheet. So what changed? The short answer is debt, although debt by itself is not categorically a bad thing. In MCHP’s case, the company completed the acquisition of Microsemi, a provider of semiconductor and system solutions for aerospace and defense, communications, data centers and industrial markets. MCHP borrowed approximately $8.1 billion – more than four times the roughly $1.9 billion that was on their books in March – to complete the acquisition. Initially hailed as an opportunity for the company to expand its presence into aerospace and defense in particular, MCHP management revealed that Microsemi’s managers had stuffed their sales channels with excess inventory in order to inflate revenues ahead of the deal’s closing, along with a culture of “excessive extravagance and high spending” that prompted them to immediately replace all of Micorsemi’s top leadership.

    The deal certainly has damped enthusiasm for the stock; the stock plunged more than $11 per share on the day of the earnings report, or a little over 11% overnight. Since that point, the stock has dropped about 7% more; since finding a top at around $104 in early June, that puts MCHP’s total decline at nearly 21% in the last two months alone. That’s bear market territory for a stock whose management also cited concerns about tariffs on their products, and disclosed about $200 million in excess inventory at Microsemi that must be reduced. Most analysts are predicting that both elements will weigh on sales for the next couple of quarters. That is the kind of negative news that is more likely to keep the stock dropping even further, and represents a much higher level of risk than even the most die-hard of value investors should probably stay away from for the time being.

    Given some of the other elements that actually make management’s expertise and effectiveness quite clear, I actually think there is likely to be a very good opportunity down the road to work with MCHP; but it could be several months down the road, and at a much more depressed price – which of course also suggests that the stock is very likely to be an incredible value story eventually. Hopefully the information I’ll share below will give you an idea about where that level might be most likely to be found.

    Fundamental and Value Profile

    Microchip Technology Incorporated is engaged in developing, manufacturing and selling specialized semiconductor products used by its customers for a range of embedded control applications. The Company operates through two segments: semiconductor products and technology licensing. In the semiconductor products segment, the Company designs, develops, manufactures and markets microcontrollers, development tools and analog, interface, mixed signal and timing products. Its functional activities include sales, marketing, manufacturing, information technology, human resources, legal and finance. Its product portfolio comprises general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, a spectrum of linear, mixed-signal, power management, thermal management, radio frequency (RF), timing, safety, security, wired connectivity and wireless connectivity devices, as well as serial electrically erasable programmable read-only memories (EEPROMs) and serial flash memories. MCHP has a current market cap of about $19.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings have grown about 21.5%, while revenues increased about 25%. The company’s margin profile shows that Net Income as a percentage of Revenues in the last quarter was only about 2.9% for the last twelve months. This is a negative that should be considered against the context of the Microsemi deal, and consideration given to a historical comparison of what MCHP management has done under normal conditions. A year ago, Net Income as a percentage of revenues was a much healthier 12.5%. It is true that not all of the decline can be attributed solely to one extremely bad deal; I think pressure from decreased sales to Chinese customers, which is likely to continue, is also coming to bear. But it should at least leaven some of the negativity about the company’s ability to manage their earnings and sales effectively. Give them some time to work through the excess Microsemi inventory and get that organization folded into their existing structure and culture; at that point, and I believe we’ll be likely to see margins return to healthy levels.
    • Free Cash Flow: MCHP’s free cash flow is healthy, at more than $1.1 billion. This is a number that is a bit lower since the beginning of the year, but not by much – only about 6.7%. That’s pretty minimal considering the magnitude of the Microsemi problem.
    • Dividend: MCHP’s annual divided is $1.46 per share and translates to a yield of 1.76% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MCHP is $21.75 and translates to a Price/Book ratio of 3.79 at the stock’s current price. The stock’s historical average Price/Book ratio is 4.84, which puts a target price for the stock at about $105 per share, or nearly 21% above its current price and a little above its early June highs. It’s also worth noting that Book Value increased dramatically in the last quarter from only $14 – which can be taken a direct reflection of the Microsemi acquisition (warts and all). As I already observed, I think the stock is likely to keep dropping while concerns about Microsemi and China persist. Where is the bottom? I’m not sure; but given the already pretty high discount, I think that if the stock is anywhere around $75 – or possibly lower – when the numbers start to show the company is beginning to find its way through its current predicament, the bargain proposition could be just too good to pass up. I’ll show you how I’m coming up with that price level below.

    Technical Profile

    Here’s a look at the stock’s latest technical chart.


    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s decline from a high at around $104 is hard to miss, of course; but the reason I’m showing you two years’ worth of price activity is to illustrate where I think the stock could begin to stabilize. It is currently sitting almost on top of the 50% retracement line; but given the stock’s current bearish momentum, and likely continued negative sentiment, I don’t expect that support to hold. The next support level, around $75, lines up with the 61.8% retracement line. Assuming the stock’s Book Value remains consistent (admittedly, not a given), a drop to $75 would put the stock at a 40% discount to its historical Price/Book Value ratio. That’s a pretty interesting price level, so if the company begins to show any signs of financial recovery from its Microsemi acquisition, it could be a screaming bargain at that point – or any price below it.
    • Near-term Keys: I really don’t see a picture for MCHP that would motivate me to want to consider any kind of bullish trade right now; any attempt to buy the stock or work with call options at its current level could only be characterized as high speculation, with prohibitively low probabilities of success. The downside risk far exceeds any upside potential right now. On the other hand, a break below the 50% retracement line at around $80 could be a good signal if you want to place a short-term, momentum-based trade to short the stock or start working with put options.

  • 09 Aug
    WDC was a good buy a few weeks ago; now it’s a GREAT buy

    WDC was a good buy a few weeks ago; now it’s a GREAT buy

    In late July, and just before they released their latest quarterly earnings report, I wrote about Western Digital Corporation (WDC) and the fact that the stock had dropped more than 28% below its all-time high at around $108. The stock was around $75 per share then, and following their earnings report, the stock plunged even more; as of this writing the stock is just a little above $66 per share. At the end of July, I thought the stock was a nice buy; after reviewing the stock’s latest earnings information, and taking the latest drop into account, I think it’s an even bigger bargain now.

    So what’s been driving the latest plunge (almost 11.5% since my last post about this stock)? Sometimes, the stock market makes sense – or at least, you can tie what a stock is doing at a given time to specific news, or to something about the underlying company that has some semblance of logic to it. Often, though, it’s downright maddening. I’ll admit that when I first saw WDC drop below $70 I struggled to tie it to anything concrete. I’ve kept digging, and while I think I’ve found a couple of threads to tie the decline to, the logic behind one of them makes me shake my head.

    Shortly after my post, WDC published its latest quarterly earnings report. The numbers were good across the board – every fundamental measurement I use in my analysis remained very healthy or improved, including the company’s Book Value. It was right after that report, however that the stock started to drop. At the same time, WDC’s only real competitor in the HDD space, Seagate Technology Plc (STX) released their own earnings report. STX’s report reflected a reality that seems to be scaring investors about either company, because sales of HDD drives continues to decline. In the consumer space, in particular, HDD clearly looks like a dying breed. And while STX is focusing more and more on the only market where HDD sales remain healthy – the enterprise, cloud server storage space – they don’t have a plan to evolve their business beyond that. WDC, at least in part, looks like a victim by association of STX’s poor report, which also prompted downgrades on that stock from analysts. That’s the part that makes me scratch my head, because anybody that thinks STX is in a better position than WDC to stay relevant has to be smoking something.

    The other thread I’ve found, and that the market seems to be teeing off on, is the fact that competition in the SDD and NAND space – memory types that are built on solid-state technology, and a major piece of WDC’s evolution strategy – is intensifying. WDC bought SanDisk in 2016 primarily because they knew that staying pat with HDD technology was a loser’s game; acquiring SanDisk immediately put them at the front of the SSD and NAND chip pack. There is market data that suggests supply of SSD and NAND chips is higher than demand right now. With more companies like Micron Technology (MU), Intel Corporation (INTC) and others making forays into the space, it isn’t a given WDC will maintain their leadership position in this segment. Intensifying competition, along with high supply clearly is also playing a role right now in the stock’s decline.

    Competition in any business segment is a normal thing, and while that increases the pressure on any company, a good management team doesn’t shy away from it. I really like WDC’s strategy, and I think that in the long run they’re doing the right things to keep their business growing. Their fundamentals remain excellent in the meantime, which really means that if the stock was a nice buy at $75, it’s a great buy now.

    Fundamental and Value Profile

    Western Digital Corporation (WDC) is a developer, manufacturer and provider of data storage devices and solutions that address the needs of the information technology (IT) industry and the infrastructure that enables the proliferation of data in virtually every industry. The Company’s portfolio of offerings addresses three categories: Datacenter Devices and Solutions (capacity and performance enterprise hard disk drives (HDDs), enterprise solid state drives (SSDs), datacenter software and system solutions); Client Devices (mobile, desktop, gaming and digital video hard drives, client SSDs, embedded products and wafers), and Client Solutions (removable products, hard drive content solutions and flash content solutions). The Company develops and manufactures a portion of the recording heads and magnetic media used in its hard drive products. WDC’s current market cap is $19.9 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 29% while revenue growth was modest, posting an increase of almost 6%. WDC operates with a narrow margin profile of about 1%. By comparison, STX’s margins are around 10%. I believe the difference is a reflection of the company’s differing approach to growth; STX focuses almost exclusively on the higher margin aspect of increasing enterprise demand, while WDC takes a two-tiered approach by meeting enterprise demand for HDD drives while also pushing hard on innovation and evolution with SSD storage.
    • Free Cash Flow: WDC’s free cash flow is very healthy, at almost $3.4 billion. That translates to a free cash flow yield of almost 17%, which is much higher than I would normally expect given the company’s narrow operating margins.
    • Debt to Equity: WDC has a debt/equity ratio of .95. That number declined from a little above 1 two quarters ago, as long-term debt dropped by more than $1 billion. Their balance sheet indicates their operating profits are more than adequate to repay their debt, and with almost $5 billion in cash and liquid reserves, the company has excellent financial flexibility, which they plan to use to pay down debt, repurchase their shares and consider other strategic acquisitions.
    • Dividend: WDC pays an annual dividend of $2.00 per share, which translates to a yield of about 3% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WDC is $38.53 and translates to a Price/Book ratio of 1.7 at the stock’s current price. Their historical average Price/Book ratio is 2.12. That suggest the stock is trading right now at a discount of a little over 19%, which is attractive; to support that opinion, the industry average is 4.6. That suggests the stock could be even more significantly undervalued right now. Using a long-term target price above $140 is probably over-optimistic since the stock’s highest price was reached in late 2014 around $110; however if the company’s evolution strategy is correct, as I expect it to be, that historical high is useful.

    Technical Profile

    Here’s a look at the stock’s latest technical chart.


    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock broke below strong support from repeated low pivots since late last year at $75, which has really driven the stock’s bearish momentum. The Fibonacci analysis shown on the chart above makes it hard to see where the stock’s next support level is likely to be. The upward trend that ended in March actually began in March 2016 at a low of around $35 per share; applying the same Fibonacci calculations to that trend puts the 61.8% retracement level at around $62.50, meaning that the stock is nearing the next important support area.
    • Near-term Keys: The stock is already offering a significantly discounted price relative to where I think it’s long-term potential lies. The truth is that if you went long on this stock in late July, you’re probably trying to decide what to do to manage the position now. I think there is more than adequate argument to hold on and ride out the stock’s current downward trend; but if you want to limit your risk, using a stop loss 25% below your purchase price would be a smart, conservative approach. If you’re thinking about trying to short the stock or start working with put options to take advantage of downside, the best signal for that kind of trade came at the end of July, so that opportunity has come and gone. The next signal for a bearish trade would come if the stock continues to break down and drops below $62. That could see the stock drop another $10 lower to around $51 or $52.

  • 06 Aug
    Trade war fears are making MU look like a fantastic bargain

    Trade war fears are making MU look like a fantastic bargain

    No matter how much the market tries to focus on something else, it seems like the trade war always manages to find its way to the front and center position of market commentary and awareness. That was true again over the weekend as the Chinese government countered the Trump administration’s latest proposal of $200 billion in new tariffs with $60 billion of their own against U.S. goods. It keeps worries about what the actual impact and effect of a long-term trade war with our country’s largest trade partner is going to be. It’s definitely one of the most obvious factors that has contributed to the market’s increased volatility throughout the year, and I think it is going to continue to hold people’s attention throughout the year.

    Naturally, one of the things this kind of uncertainty should make you do is to think about how it is going to impact the investment decisions you decide to make. In this day and age, it’s hard to find publicly traded companies that aren’t doing business in some way with China or other parts of the world, like the E.U., where the trade war is front and center – either by selling their products there or having them manufactured and produced there and then bringing them back home. The global nature of our economy, and the interconnectedness that we now live in means that even the smallest of companies are likely to have some element of exposure to global trade risk. That reality means that companies with known ties to China and other parts of the world are subject to even greater price volatility and general market risk.

    The semiconductor industry has been an interesting proxy for trade war risk  since mid-March when the saber-rattling first began in earnest. As measured by the iShares Semiconductor ETF (SOXX), the sector dropped a little over 50% by the end of April. It has rebounded a bit since then, but remains about 6% below its March high point. That has put a significant amount of pressure on a lot of big names in the sector like Intel Corporation (INTC), Applied Materials, Inc. (AMAT), Micron Technology, Inc. (MU) and Lam Research Corporation (LRCX), to name just a few that all remain well below – by at least 15%, if not more – their 52-week highs. And while I don’t think you should discount or dismiss trade war risk for these companies, I do think that a proper amount of perspective can help to determine how significant their risk really is versus what the market perceives their risk to be. It can also help to determine if a stock’s discounted price because of trade war fears could offer an under-appreciated bargain opportunity for value investors.

    MU is a great example of what I mean. Last month, the company made headlines – but not in a good way  – when they confirmed that a court in China had granted a preliminary injunction banning its Chinese subsidiaries from selling its products in the country. The stock has shown some resilience since that news broke, but remains under pressure, down nearly 20% from its high around $65 in late May. The perception, of course is that the measure, which seems clearly intended as a targeted countermove to U.S. tariffs, is going to have a significant negative impact on MU’’s business. The reality, however is quite different; the company estimated when they confirmed the injunction that the impact would only be about 1% of total revenue for the quarter, or about the same percentage that Chinese sales made up of their revenues over the last year. In the meantime, demand appears to remain strong, as the company also reaffirmed their own forward estimates of revenue. Another element that has contributed to strength for MU is the fact that supply of DRAM/NAND memory chips lags demand, which is keeping their pricing strong. It is possible that the negative revenue impact from the China sales ban could simply intensify the shortage; that could act as an extra pricing tailwind in the near-term.

    As you’ll see next, there really is a lot of like about MU’s business right now, and while the stock’s negative price performance does suggest short-term risk exists, the fact is that does look like a very good value play right now.

    Fundamental and Value Profile

    Micron Technology, Inc. (MU) is engaged in semiconductor systems. The Company’s portfolio of memory technologies, including dynamic random-access memory (DRAM), negative-AND (NAND) Flash and NOR Flash are the basis for solid-state drives, modules, multi-chip packages and other system solutions. Its business segments include Compute and Networking Business Unit (CNBU), which includes memory products sold into compute, networking, graphics and cloud server markets; Mobile Business Unit (MBU), which includes memory products sold into smartphone, tablet and other mobile-device markets; Storage Business Unit (SBU), which includes memory products sold into enterprise, client, cloud and removable storage markets, and SBU also includes products sold to Intel through its Intel/Micron Flash Technology (IMFT) joint venture, and Embedded Business Unit (EBU), which includes memory products sold into automotive, industrial, connected home and consumer electronics markets. MU has a market cap of $60.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings more than doubled – growth was 128%, while sales growth was above 40%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize their business operations. Net Income as a percentage of Revenues for MU is very impressive at more than 43% for the last twelve months and improving to nearly 50% in the last quarter.
    • Free Cash Flow: MU’s free cash flow over the last twelve months is more than $7.5 billion. Cash and liquid assets are also almost $7.1 billion, against only about $5.9 billion of long-term debt.
    • Debt to Equity: MU has a very conservative debt-to-equity ratio of .20. As already observed, their available cash and liquid assets is about $1.2 billion higher than their long-term debt, and with their high operating margin, there is clearly no issue with the company’s ability to service, or even to liquidate their debt.
    • Dividend: MU does not pay a dividend.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MU is $25.45 per share. At the stock’s current price, that puts the Price/Book ratio at 2.05, versus a historical average of 2.26. The historical average puts the stock’s “fair value” at about $57.50, which is only about 10% away from its current price. That’s not very compelling by itself, but there are a couple of other measurements that, put together, offer what I think is an enhanced perspective. The stock’s P/E ratio – which, admittedly, I usually discount – right now is very low, at 5.12 times earnings compared to an historical average of 9.02. Also, their Price/Cash Flow ratio is 4.2 versus an historical average of 7.02. Those measurements are each 40% their historical averages. I think a 40% increase in the stock price is probably over-optimistic even as a long-term target since the stock’s 52-week high around $65 is higher than the stock has been since mid-2000 (the end of the “dot-com boom”); but it does put that high within sight, meaning that the opportunity in the stock right now is nearly 20%. That’s a very nice opportunity from a value-based standpoint!

    Technical Profile

    Here’s a look at the stock’s latest technical chart.


    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend until May of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock’s decline from late May’s high at around $65 puts the stock in a clear, intermediate-term downward trend. More recently, the stock has round strong support in the $52 price range, just a little above the 38.2% retracement line. That support level also coincides pretty well with trend support from the 50-day moving average (not shown), indicating that the stock’s long-term trend should be expected to hold its strength for the foreseeable future. A break below $50, however would put the stock’s price decline above 20% and into bear market territory; I would take that as an early warning sign the long-term trend could reverse, with a further drop below $45 – about where the 50% retracement line sits right now – acting as confirmation of a bearish trend reversal.
    • Near-term Keys: The question for a long-term, value-oriented investor is whether you would be willing to endure the kind of potential decline that could come if the stock breaks its current long-term trend support. I think the stock offers a great value right now; but if you think the stock’s current bearish momentum is going to extend further, it could be better to wait to see if the stock offers an even bigger value by consolidating around $45 per share. Short-term traders should wait to see the stock break above current pivot resistance around $57 before trying to buy the stock or work with call options to take advantage of a bullish swing. A drop below $50 could offer a reasonable short-term opportunity by shorting the stock or working with put options, with $46 as a pretty attractive near-term target price.

  • 11 Jul
    AMAT is about to break down despite great fundamentals

    AMAT is about to break down despite great fundamentals

    For the last week or so, I’ve noticed that the market seems to be trying to shrug worries about trade tensions aside and focus on other matters, like continued strength in the U.S. economy as measured by things like unemployment and payroll figures, along with corporate earnings that generally seem to keep coming in with healthy growth. This morning, however, trade is once again rearing its ugly head, as overnight the Trump administration published a fresh list of proposed tariffs on an estimated $200 billion of Chinese goods. Not surprisingly, China is promising to retaliate and accusing the U.S. of using bullying tactics to try to get their way. I’ve also heard some rumbling over the last couple of weeks about the flattening yield curve and the chances it could invert, which a lot of experts would read as a leading indicator of a looming recession. I’m not so sure that a flattening curve right now is as problematic as some think. There are some interesting global factors at play right now, including negative interest rates in Germany and Japan that make short-term U.S. Treasuries more attractive worldwide than what we’ve seen happen historically. On the other hand, an extended, long-term trade conflict with China and our other biggest trade neighbors could be a catalyst that drives up costs, not only in the U.S. but across the globe to the point that recession becomes inevitable.

    With respect to China, the Semiconductor industry has seen a lot of negative price pressure for the last few months, because so much of the fabrication and production of semiconductor products comes from that country. The Trump administration’s tariffs against China imports are intended to protect U.S. technology and intellectual property (or so they want the world to believe) but at the same time many of them penalize American companies that use Chinese manufacturers to produce their finished product. That puts the entire sector at risk, which includes companies like Applied Materials, Inc. (AMAT), who provide manufacturing equipment, services and software to the sector.

    AMAT is down about 28% since early March, when President Trump first started rattling the tariff saber. That’s a big drop over that period that has forced the stock into an intermediate-term downward trend. The strength and momentum of that trend appears to be approaching an inflection point right now, and assuming the U.S. and China won’t stop pointing fingers and actually find a way to come an agreement anytime soon, I think there is a real chance that AMAT could break down to levels it hasn’t seen since late 2016. This is a risk that belies the company’s overall fundamental strength and strong financial position; in the long run, I think that strength will set up an interesting value proposition at some point down the road. For now, however, the downside risk from those external, geopolitical factors far outweighs any long-term opportunity.

    Fundamental and Value Profile

    Applied Materials, Inc. provides manufacturing equipment, services and software to the global semiconductor, display and related industries. The Company’s segments are Semiconductor Systems, which includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation; Applied Global Services, which provides integrated solutions to optimize equipment and fab performance and productivity; Display and Adjacent Markets, which includes products for manufacturing liquid crystal displays, organic light-emitting diodes, upgrades and roll-to-roll Web coating systems and other display technologies for televisions, personal computers, smart phones and other consumer-oriented devices, and Corporate and Other segment, which includes revenues from products, as well as costs of products sold for fabricating solar photovoltaic cells and modules, and certain operating expenses. AMAT has a current market cap of $45.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased 54%, while sales increased almost 29%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. The company’s Net Income versus Revenue was almost 25% in the last quarter, which indicates their operating margins are very healthy.
    • Free Cash Flow: AMAT’s Free Cash Flow is strong, at more than $3.6 billion. While this number declined from about $4 billion in its most recent quarter, it has increased consistently since late 2015 when it was a little under $1 billion.
    • Debt to Equity: AMAT has a debt/equity ratio of .75, which is manageable despite its increase from .62 in the last quarter. The company has more than $5.3 billion in cash and liquid assets, which means they they have plenty of liquidity, against $5.3 billion in total long-term debt.
    • Dividend: AMAT pays an annual dividend of $.80 per share, which at its current price translates to a dividend yield of about 1.77%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for AMAT is $6.99 per share. At the stock’s current price, that translates to a Price/Book Ratio of 6.45. The average for the Insurance industry is 5.3, while the historical average for AMAT is 4.06. That is a  pretty good indication the stock remains overvalued right now despite its decline since March. A move to par with its historical average would put the stock a little above $28 per share, which is actually below the technical bottom I’m forecasting if the stock’s current downward trend continues to assert itself.

    Technical Profile

    Here’s a look at the stock’s latest technical chart.


    • Current Price Action/Trends and Pivots: The chart above covers the last two and a half years because I want to give you an idea of how far AMAT has come; the impressive rise from around $15 that started at the beginning of 2016 to a high above $60 is remarkable by any measure. The stock’s terrific run was driven in no small part by the company’s fundamental strength, and those fundamentals remain solid, so there is an argument to be made that the stock should remain higher than it where it started. Given that the stock has dropped almost 30% in just four months despite its fundamental strength, however also provides some context for how much downside risk I think there is in the stock from external forces. The stock is sitting on a strong support level around $45 right now, which I’m highlighting with the blue horizontal line. If it drops below that point, its next likely support level would be around $40 (yellow horizontal line). Another break below that level could easily see the stock drop all the way to around $30, which would mark a 33% drop from the stock’s current level, and a 50% total drop from its March highs. Bullish upside is also limited right now by the bearish strength of the intermediate trend, shown by the green moving average line. The stock would have to break above $50 with strong upward momentum and buying volume before any reversal of the intermediate trend could be confirmed.
    • Near-term Keys: Watch the $45 support level. A break below that point is a strong indication the current downward trend could resume its momentum; the best trading probabilities in that case would come from bearish trades, such as buying put options or short selling the stock. If the stock starts to reverse higher from $45, be patient and wait for the stock to break above $50 before considering any kind of bullish trade.

  • 02 Jul
    SWKS is an interesting proxy for Semiconductor sector risk

    SWKS is an interesting proxy for Semiconductor sector risk

    As trade tensions continue to linger, one of the sectors that I think is going to keep seeing pressure on a global scale is Semiconductors. A recent study indicates that while this sector remains the second-largest exporting industry in the United States, its global market share has eroded, with much of its production, and even research and development investments shifting to China, Taiwan, and much of Asia. This is no doubt a part of the reasoning behind the Trump administration’s push to impose tariffs on Chinese technology imports. It is a core reason that while demand for semiconductors is likely to remain strong, costs are also likely to increase the longer the standoff between the U.S. and China continues. The question about what semiconductor producers will do – passing the costs on to their customers, or absorbing the costs themselves – isn’t encouraging for investors, because either option poses problems.

    Today’s stock is a company with a great fundamental profile, and that operates in what is likely to be one of the biggest growth areas of the entire technology space. Skyworks Solutions Inc. (SWKS) built its business by providing connectivity solutions to mobile devices like smartphones. It remains a key supplier for Apple’s (AAPL) iPhones, but has also diversified its business into the Internet of Things (IoT) space with applications for autos, smart home devices, and industrial equipment. Why do I think this is going to be such a big deal for future growth? The short answer is 5G. Most of the companies that will be providing the backbone of 5G connectivity – wireless towers and so on – are required to complete the buildout of their respective networks by 2020 or they will lose the 5G spectrum leasing rights they have collectively invested hundreds of billions (and quite possibly trillions) of dollars into. As those networks come online, demand for IoT devices that can connect to them are sure to be in high demand, on a consumer and industrial level. That said, SWKS has big exposure in Asia, with Goldman Sachs reporting earlier this year that the company derives 85% of its sales in China, and so prolonged, unresolved trade tensions and tariffs could significantly erode their profit margins.

    Fundamental and Value Profile

    Skyworks Solutions Inc. designs, develops, manufactures and markets semiconductor products, including intellectual property. The Company’s analog semiconductors are connecting people, places, and things, spanning a number of new and unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. Its geographical segments include the United States, Other Americas, China, Taiwan, South Korea, Other Asia-Pacific, Europe, Middle East and Africa. It operates throughout the world with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America. It is engaged with key original equipment manufacturers (OEM), smartphone providers and baseband reference design partners. Its product portfolio consists of various solutions, including amplifiers, attenuators, detectors, diodes, filters, front-end modules, hybrid, mixers, switches, and modulators. SWKS has a current market cap of $17.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing almost 13% while sales increased about 7.25%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long term, but it is also a positive mark of management’s ability to effectively maximize the company’s business operations.
    • Free Cash Flow: SWKS has very healthy free cash flow of more than $1.2 billion over the last twelve months. This is a number that has more than doubled since mid-2016.
    • Debt to Equity: SWKS has had zero debt on its balance sheets since the beginning of 2015, which means that all of its operating profits can be used to fund research and development, expand its offerings, and bolster its cash and liquid assets. As of the last quarter, the company had more than $1.8 billion in cash, an increase of 80% from mid-2016 when it was a little under $1 billion.
    • Dividend: SWKS pays an annual dividend of $1.28 per share, which at its current price translates to a dividend yield of 1.32%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SWKS is $22.34 per share. At the stock’s current price, that translates to a Price/Book Ratio of 4.30. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Semiconductor & Semiconductor equipment industry is only 4.1; this is also the historical average for SWKS. That generally implies SWKS is fairly valued at current price levels. On a Price/Cash Flow basis, however, the stock is trading more than 34% below its historical average, suggesting a long-term price target of $128 per share.

    Technical Profile

    Here’s a look at the stock’s latest technical chart.


    • Current Price Action/Trends and Pivots: The red, diagonal line traces the stock’s upward trend trend dating back to July of last year. It is also the basis for calculating the Fibonacci retracement lines on the right side of the chart. The stock sitting practically on top of the 38.2% retracement line and has used this level for significant support multiple times since December of last year. That could give the stock another bounce, with short-term upside around $102 per share. Under current market conditions, that would likely require some kind of macroeconomic catalyst such as easing trade tensions rather than a quantitative, fundamental basis. If the stock breaks below $94, the next likely support is around $87 per share, which is also where the 50% retracement line sits. Assuming the U.S. – China trade relationship continues to deteriorate, the next likely support level around $80, or even lower is certainly not out of reach.
    • Near-term Keys: If the stock breaks below $94 as just mentioned, I believe the stock should easily drop to as low as $87 before finding any kind of significant support. An additional break below $87 would confirm a legitimate downward trend that could keep the stock dropping to somewhere between $65 and $71 per share. These could be interesting opportunities for shorting the stock or working with put options. If the stock does recover bullish momentum and manages to break the $102 level, there could be an attractive opportunity to work with the long side by either buying the stock outright or using call options.

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