Technology

  • 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 →

  • 10 Sep
    Want to be a smart value investor? Pay attention to great stocks at deep discounts – like WDC

    Want to be a smart value investor? Pay attention to great stocks at deep discounts – like WDC

    Since mid-July, I’ve written twice previously about Western Digital Corporation (WDC). The first time I wrote about them, the stock was priced around $75 per share, and my analysis showed that was a nice price for a good company that had hit an all-time high at around $107 just a few months before. On August 9, I wrote about them again, because the stock had dropped even lower, to around $66 per share, but now also had its most recent earnings report to add to the mix. At a price that was about 12% lower than just a few weeks before, and with a terrific fundamental profile, what had been a “nice’ price for the stock was now looking like a “great” price. Fast forward a month, and as of this writing the stock is now below $58 per share. The fundamentals haven’t changed in four weeks, but in the last week or so the stock picked up some more negative momentum and is pushing to even deeper lows.

    So what’s been driving the latest plunge, which has driven the stock down a little over 23% since my first post in July? 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 July 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 storage continues to decline. In the consumer space, in particular, HDD clearly looks like a dying breed.

    The picture for NAND and SSD storage – memory that is built on solid-state technology, and what has increasingly become the preferred storage type in the consumer market, including for personal computers of just about any type, tablets, and pretty much any type of mobile device – also appears murky, and that is another element that is working against the stock’s price right now. Multiple recent reports from industry analysts indicate that pricing for NAND memory is dropping amid concerns about oversupply as well as increasing competition in the space. That puts pressure on the second tier of WDC’s business strategy; the first tier continues to provide HDD storage to the enterprise and cloud storage market (where the larger capacities available from traditional drives is needed), while the second included the 2016 acquisition of SanDisk to put them at the front of pack in the consumer-driven NAND and SSD market.



    The truth, of course is that 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 and is a major centerpiece of every argument I’m finding against paying attention to this space right now. That is actually one of the biggest reasons that i continue to think the opportunity with the stock is even better today than it was a month ago.

    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. I’m even willing to concede that pricing pressures in the NAND and SSD space could impact the company’s earnings in the near term; but I think the market is over-selling that risk to the point that the stock’s incredibly deep discount now – more than 46% below its March high – is making the stock an undeniable bargain. Even the analysts that are writing scary predictions right now are putting the stock’s long-term target price at around $75, which is about 30% above the stock’s current price, and not too far from my own target, as you’ll see below.



    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 $16.8 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 NAND and 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 almost 3.5% at the stock’s current price. That fat dividend – quite a bit higher than the S&P 500 average, which is a little below 2% – is a good reason to think seriously about buying the stock and waiting out any near-term price volatility you might have to endure. It’s free money you don’t have to do anything for except to hold your shares.
    • 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 1.45 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 31%, which is very attractive, since it puts the stock’s long-term target price at nearly $84 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 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 stock is currently plumbing lows not seen since late 2016, where previous pivots put the most likely support in the $53 range.
    • Near-term Keys: As you can see, the stock is already offering a massively 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 would come if the stock manages to break prior pivot support at around $53. That could see the stock drive even lower and into the mid-$40 range.


  • 30 Aug
    SYMC looks like a value trap!

    SYMC looks like a value trap!

    The market looks like it’s trying to reclaim the long, extended upward run it’s been following since late 2009. This week, following the announcement of a new trade deal between the United States and Mexico, the market finally broke above the all-time high it set in January of this year before dropping back a little over 10%. More →

  • 28 Aug
    Why AT&T really does look like a solid value play

    Why AT&T really does look like a solid value play

    While the tech sector, in a broad sense, has been one of the most stellar performers in the marketplace for the past few years, telecommunications stocks, almost all of which have operations that naturally bleed into many of the same areas as some of the largest tech companies in the world, haven’t followed suit. More →

  • 24 Aug
    FAANG bubble? Basic valuation analysis says YES!

    FAANG bubble? Basic valuation analysis says YES!

    This New Tesla Coil is the Future of Electricity

    In 1891, Nikola Tesla stunned the scientific community by inventing a device that could transmit electricity through the air. This breakthrough device could power light bulbs and electric motors wirelessly, at a distance of a few feet.

    Read More

    It’s not quite 20 years since the “dot-com boom” became the “dot-com bust,” but as the market extends itself into the longest bull market in history, it’s hard not to see some of the same characteristics between the stock market in the years leading up to that crash and this one. 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.


  • 02 Aug
    CSCO is down almost 10% since May – should you buy the dip?

    CSCO is down almost 10% since May – should you buy the dip?

    Cisco Systems Inc. (CSCO) is one of the most recognizable and established companies in the Technology sector. With a market cap of nearly $200 billion, they are also one of the largest, if not THE largest player in the Networking & Communications segment. They are, without question, the standard that all other networking businesses are measured and compete against. No matter whether you’re talking about wired or wireless networking, CSCO is one of the companies that not only developed the standards and infrastructure the entire Internet is built on today, but that continues to lead the way into the future, including the next generation of technology in the so-called “Internet of Things” (IoT).

    It’s ironic, perhaps that despite CSCO’s unquestioned dominance in its market, the stock has mostly languished for nearly two decades. After riding the “dot-com boom” of the late 1990’s to a peak at around $80 per share, the stock cratered when that boom went bust, dropping to as low as about $8 in late 2002. From that point it never rose higher than into the low $30 range – at least not until the latter part of 2017, when the stock finally broke that top-end resistance. That pushed the stock to a high in May a little above $46 per share as Tech stocks generally prospered.



    Recently, however, it seems that CSCO has fallen victim to the latest “Amazon rumor mill” phenomenon that has afflicted companies like CVS Health Corp (CVS), The Kroger Company (KR), and others who watched their stock price slide amid rumors Amazon.com (AMZN) was looking for a way to expand its business into their respective industry. The latest rumor is that AMZN is considering branching their Web Services unit into network switching hardware – the same technology that CSCO has dominated for more than two decades. 

    Despite the fact AMZN has provided no validation of the rumor, and in fact has given to indication they were in fact considering the move, or actually developing any such products, the mere suggestion has been sufficient to help drive the stock from that May high price to its current level a little below $42 per share. That might not sounds like much of a drop, but it does represent a 10% decline in the stock price – enough that some analysts have been recommending investors should “buy the dip.”

    I’m not sure that I agree. While I recognize CSCO’s dominance in its industry, expect it to continue, and recognize the company’s core fundamental strength, my reliance on value analysis also forces me to look at the stock’s current price in more conservative terms. It looks very overvalued right now. The company is due for its latest earnings report later this month, and that report could alter my perspective somewhat; but as of now I have to believe the stock is at a greater risk of a steeper decline than it is of staging a rebound to test its recent highs. Here’s what I mean.



    Fundamental and Value Profile

    Cisco Systems, Inc. (CSCO) designs and sells a range of products, provides services and delivers integrated solutions to develop and connect networks around the world. The Company operates through three geographic segments: Americas; Europe, the Middle East and Africa (EMEA), and Asia Pacific, Japan and China (APJC). The Company groups its products and technologies into various categories, such as Switching; Next-Generation Network (NGN) Routing; Collaboration; Data Center; Wireless; Service Provider Video; Security, and Other Products. In addition to its product offerings, the Company provides a range of service offerings, including technical support services and advanced services. The Company delivers its technology and services to its customers as solutions for their priorities, including cloud, video, mobility, security, collaboration and analytics. The Company serves customers, including businesses of all sizes, public institutions, governments and service providers. CSCO has a market cap of $197 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by a little over 11%, while sales growth was more modest, at about 4%. 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. In the most recent quarter, both metrics grew about 4%. Over the last twelve months, the company also reported negative Net Income of about $1.2 billion, raising questions about their operating costs and margins.
    • Free Cash Flow: CSCO’s free cash flow over the last twelve months is more than $12 billion. This is a number that the company has historically managed to maintain at very healthy levels. It should be noted that the negative Net Income just mentioned appears to be a temporary phenomenon, and the company’s massive “war chest” of cash really makes it just a temporary blip on the radar.
    • Debt to Equity: CSCO has a conservative, manageable debt-to-equity ratio of .44. I already alluded to the company’s large cash position; at more than $54.4 billion, it is also more than twice the total amount of long-term debt shown on their balance sheet. The company also recently announced the repatriation of approximately $67 billion of cash from overseas resulting from the passage of tax reform, with plans to use the money to fund a 14% dividend hike and a $25 billion increase its ongoing share repurchase program as a clear effort to return value to their shareholders.
    • Dividend: CSCO currently pays an annual dividend of $1.32 per share, which translates to an annual yield of 3.15% 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 CSCO is $9.69 per share, and this is where the biggest cracks in the bargain argument really exist. At the stock’s current price, its Price/Book ratio, at is more than 4.34, is nearly twice as high as its historical average of 2.42; a drop to par with that average puts the stock at risk of a decline of more than 43% (around $23.50 per share) from its current price. That would also put the stock at price levels it hasn’t seen since early 2016.



    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 early May 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 that point has followed a pretty gradual slope, which to some is a positive indication. I tend to believe the opposite is true, since gradually sloping trends, in any direction are generally easier to sustain over an extended period of time. It can also be argued that the more gradual a trend’s slope is, the more likely the trend’s momentum becomes to accelerate in the direction of that trend; at some point, more and more investors will take note of the trend and be likely to overreact to it. The stock is currently quite near to the 38.2% Fib retracement level around $40.25, with $38 or even $36 (the 50% and 61.8% Fib levels, respectively) not far out of reach. Compared to the upside if the stock reverses the short-term downtrend, you have about $5 per share in either direction, which translates to a 1:1 risk-to-reward ratio right now.
    • Near-term Keys: “Buying the dip” right now is pretty risky move, and when the potential opportunity is identical to the likely risk, it’s hard to say that’s a good decision to make. The risk: reward profile could change if the stock comes a little closer to the 38.2% retracement line, and then pivots back to the upside; that could offer a reasonable opportunity to go long in the stock or to start working with call options, with a tight stop set just below that retracement line at around $39 per share. A drop below $40, on the other hand might offer a reasonable opportunity to short the stock or start working with put options, with a closing target price in that case in the $36 range.


  • 20 Jul
    WDC is down more than 27% from its 52-week high: time to buy?

    WDC is down more than 27% from its 52-week high: time to buy?

    Throughout the year, the Technology sector has led the market in terms of performance; as measured by the S&P Technology Select Sector ETF (XLK), the sector is up almost 12.5% year-to-date, with many analysts predicting even more growth ahead. One of the trends they like to point to is the growth of cloud-based services; after the market close yesterday, for example, Microsoft (MSFT) reported that revenue for its Azure cloud service jumped 89 percent to nearly $7 billion. As an investor, targeting cloud services specifically can be a little tough, since the market leaders are diversified businesses like Amazon (AMZN), MSFT, and Alphabet’s Google (GOOGL). Perhaps another way to look at it is to focus on companies that build some of the components used in cloud servers. Western Digital Corp (WDC) is a good example.

    WDC has bucked the sector’s trend for the year, since it is down almost 5.5% for the year. More interestingly, the stock is nearly 28% below the high it found in mid-March at around $107 per share. WDC’s underperformance year-to-date, along with the fact that the stock is hovering near to its 52-week low point right now, raise some intriguing possibilities for a value-oriented investor. The hard disk drive market has seen declining trends over the last few years, since it has historically been closely tied to PC shipments. That doesn’t mean companies like WDC or its nearest competitor, Seagate Technology Plc (STX) are operating in a dying market space; it does mean that growth for stocks in this space has been closely tied to consolidation and diversification, since emerging storage technology such as solid state drives (SSD) makes standard hard disk drive (HDD) storage less and less compelling.



    In late 2016, for example, WDC completed a $67 billion-plus acquisition of SanDisk, the maker of the NAND flash memory used in SSD’s. That positions the company to navigate what most think is an inevitable, and permanent transition away from HDD storage. In the meantime, another trend that also plays into WDC’s favor is the growth in storage demand from enterprise customers like cloud service providers. That growth is expected to largely offset declining consumer demand while the SSD market is expected to mark the best path to continued growth. WDC is positioned better than STX in this respect, since STX has so far been content to rely on the increase in enterprise demand for HDD storage capacity to this point. Don’t ignore the fact, however that other players, like Intel (INTC) and Samsung Electronics are pushing hard into the SSD space, which means that competition and pricing pressures are likely to remain pretty high.

    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 $23 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 62% while revenue growth was modest, posting an increase of almost 8%. 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 is meeting enterprise demand while also pushing hard on innovation and evolution with SSD storage.
    • Free Cash Flow: WDC’s free cash flow is very healthy, at more than $3.5 billion. That translates to a free cash flow yield of more than 15%, 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 .98. That number declined from a little above 1 over the last quarter, 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 2.6% 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 $37.97 and translates to a Price/Book ratio of 2.02 at the stock’s current price. Their historical average Price/Book ratio is 2.12, which is less than 5% above its current level. That implies limited upside based on the way the market has historically priced the stock; however the industry average is 4.6, suggesting the stock could be 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, makes that historical high 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 is sitting very near to strong support from repeated low pivots since late last year. That support marks an important inflection point for the stock right now; if the stock breaks below it by dropping below $75, it could drop to as low as around $64 before finding a new, strong support level. On the other hand, a new pivot higher off of the $75 level, with strong buying volume could see the stock push near to the resistance line offered by the 38.2% retracement line around $88 in fairly short order. The stock would have to break above that resistance level to confirm a new upward trend and validate a longer-term push into the $107 to $110 level.
    • Near-term Keys: If the stocks breaks below its current support at around $75, a smart short-term trade could be to short the stock or work with put options to take advantage of the stock’s current downward trend. If the reverse is true, and the stock uses that support to bounce higher, a short-term trader should look for a push to $80 as a signal to buy the stock or start working with call options. If you’re willing to tolerate some volatility in either direction right now, and you like the long-term prospects for WDC more than any current downside, this could be a good time to take a new long-term position. A strict value-oriented investor would probably prefer to wait to see the stock test support around the $64 level, where the stock’s Price/Book ratio would also be low enough to offer a significant discount.


  • 12 Jul
    IRBT is setting up for a bullish pop

    IRBT is setting up for a bullish pop

    Despite the uncertainty that has dominated the market for most of the year, its bullish long-term trend remains in place and has continued to provide strong support to mute any drawdown. As of this writing, the S&P 500 Index looks set to push above short-term resistance and could start testing the all-time highs it set back at the beginning of the year. That should be a positive indication for stocks in general, and even while trade war risk persists, there remain interesting opportunities to be had.

    iRobot Corp (IRBT) could be one that is setting up for a good bullish trade right now. The stock’s short-term trend is up about 45% since the beginning of May, with room yet to move up another 15% if its current momentum holds. This is a small-cap stock in the Household Durables industry that is a bit of a niche play; its products won’t appeal to every consumer, but they have a strong, building customer base, and while their focus is primarily geared toward consumer robot use, it includes forward-thinking technologies like mapping, navigation, mobility and artificial intelligence. If you’re a geek like me, you can’t really walk into a Best Buy store without at least checking out the section that includes IRBT’s products, which also means that sooner or later you’re likely to buy one of your own.


    IRBT is another stock in the Household Durables industry that could also provide some protection in the event of a trade war. The company markets their products across the globe, and so incurs some financial risk; however, as of the last quarter, international sales accounted for only about 11% of the company’s total sales. They also manufacture their products entirely within the U.S., relying on international distributors to market and sell the products abroad. What financial risk exists from their international exposure is related primarily to foreign exchange rates above all else. Their last quarterly report indicates they actively use foreign currency forward contracts and swap to hedge and minimize this risk.

    Fundamental and Value Profile

    iRobot Corporation is a consumer robot company, which is engaged in designing and building robots. The Company’s portfolio of solutions features various technologies for the connected home and various concepts in mapping, navigation, mobility and artificial intelligence. The Company sells various products that are designed for use at home. Its consumer products focus on both indoor and outdoor cleaning applications. The Company offers multiple Roomba floor vacuuming robots. Roomba’s design allows it to clean under kick boards, beds and other furniture. It offers the Braava family of automatic floor mopping robots designed for hard surface floors. The Roomba 600 series robots offer a three-stage cleaning system. The iRobot HOME Application helps users to choose cleaning options for their home. Its Mirra Pool Cleaning Robot is used to clean residential pools. The Company’s trademarks include Scooba, ViPR, NorthStar, Create, iAdapt, Aware, Home Base, Looj, Braava, vSLAM and Virtual Wall. IRBT has a current market cap of $2.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased almost 27%, while sales increased nearly 29%. These are healthy numbers that indicate their business is growing aggressively. The company’s margins are a bit narrow at around 5% for the past year, although in the last quarter this number did increase to almost 10%.
    • Free Cash Flow: IRBT’s Free Cash Flow is healthy, and since they have no long-term debt, their operating profits can be directed almost completely to facilitate growth and continued innovation.
    • Debt to Equity: IRBT has a debt/equity ratio of .0, which as already mentioned means they have no long-term debt. Any short-term needs can be covered by their operating profits, along with more than $100 million in cash and liquid assets.
    • Dividend: IRBT does not pay an annual 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 IRBT is $17.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 4.58. The average for the Household Durables industry is 5.9, while the historical average for IRBT is only 3.3. Comparing the current Price/Book ratio to its historical average means the stock is overvalued, however in this case the industry average is also constructive. A move to par with the industry average would translate to a stock price of more than $104 dollar per share, which is near an all-time high which the stock reached temporarily a year ago.


    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 decline from its all-time high at nearly $110 per share to its downward trend low in early February around $56. The stock finally picked up enough bullish momentum to sustain a strong upward trend beginning in May, driving from that low point to its current price. Since that time, the stock has moved in a nice stair-step pattern, with a recent pullback to support at around $75 before bouncing higher to its current price. The green horizontal line marks previous pivot points that I think could act as an important test of the upward trend’s longer-term strength if its current bullish momentum tapers off; an upward bounce from that level should provide a good catalyst to keep the stock moving higher. The red horizontal lines on the right side of chart mark Fibonacci retracement levels of the downward trend that could provide resistance to a sustained move higher. If the stock breaks above the most immediate resistance around $83, for example it should easily test its short-term pivot high above $90, with a longer-term target around $103 possible from there.
    • Near-term Keys: Watch the $83 level; a break above that resistance should provide a good signal to enter a bullish trade, either by buying the stock outright or by working with call options. If the stock begins to retrace from its current price, pay attention to support around $72. A bounce higher from that level could also provide a good bullish trading set up at a lower price point. If the stock breaks below $72, on the other hand, the stock’s mostly downward longer-term trend would be reasserting itself, and the stock would likely see little support before dropping back into the $56 to $60 level to retest its 52-weeks lows. That could translate to a decent opportunity if you like working with put options or with short sales.


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