My bullish case for Himax Technologies(HIMX) is backed by great confidence and data. There a numerous reasons that add to my great confidence such as HIMX having a perfect Piotroski F-Score of 9, or because HIMX recently made a production deal with Google. First I will discuss the basics and historical performance involved with F-Scores then I will present why I think you should add HIMX to your portfolio at your earliest convenience.
The Piotroski F-Score is a score given to each security based on its financial health. The score is between 0 and 9; 9 indicating the company is very financially healthy and 0 indicating the company is in financial distress and the possibility of default could be right around the corner. This score is widely used across the financial industry to find good investments to buy or short. The securities are awarded one point per condition below:
- Most recent Yearly Net Income > 0
- Yearly Cash Flow from Operations > 0
- ROA has increased
- Cash Flow from Operations > Net Income
- Long-term Debt to assets is decreasing
- Current Ratio is increasing
- No new shares were issued
- Gross Margin is increasing
- Asset turnover is increasing
Let's first explore how a stock's Piotroski Score is related to performance. We will be doing this by collecting data from a back test. The back test buys and sells the stocks that pass a desired stock screener since 2003 and rebalances weekly. So each week when it rebalances it buys all new stocks that pass the stock screener and sells all new stocks that no longer pass the stock screener. The result is the annualized and total portfolio return if you would have done so since 2008. The screen shot below shows our back test graph; the green line is the portfolio return while the blue line is the return of the S & P 500.
Back test results for each score:
If Piotroski were looking at this data he would ideally like to see return decreasing from the top of the chart to the bottom as it moves down if F Score. On average, that is what we get.
The impressive trend in the data tells us the Piotroski F Score can be a good predictor of return. If I would have bought and sold all stocks with an F Score of 9 since 2008 I would have had roughly a 12.74% annualized return while the average mutual fund would have given you close to a 2.39% annual return. On the other hand if I would have bought and sold all stocks with an F Score of 0 since 2008 I would have had roughly a -7.42% annual return.
It seems Piotroski knew exactly what he was talking about when he introduced the F Score as a means of measuring a company's financial health. Very few indicators can consistently produce a trend like we see in the data above. This data has convinced me to check a company's F score every time before I consider going long or short. If long, I will obviously seek out a High F score, but if short I will be looking for stocks with a low F score. Since the F score is made purely of fundamental criteria, the data provided above tells us that fundamental analysis does matter despite what some investors think.
Now that you have confidence that companies with high F-Scores will outperform companies with low F-Scores on average, let's take a look at HIMX Technologies.
Himax Technologies is a small cap technology firm based out of Taiwan. The company description from Yahoo Finance is as follows "Himax Technologies, Inc. designs, develops, and markets semiconductors for flat panel displays. The company operates in two segments, Driver IC and Non-Driver Products. Its principal products include display drivers and timing controllers for large-sized thin film transistor liquid crystal display (TFT-LCD) panels that are used in desktop monitors, notebook computers, and televisions; and display drivers and timing controllers for small and medium-sized TFT-LCD panels, which are used in mobile handsets and consumer electronics products, such as tablet PCs, netbook computers, digital cameras, mobile gaming devices, portable DVD players, digital photo frames, head-mounted-displays, and car navigation displays. The company also offers touch controller ICs for electronic devices, such as smartphones, mobile internet devices, and tablet PCs; TFT-LCD television and monitor semiconductor solutions; and liquid crystal on silicon (LCOS) microdisplays solutions, including color-filter LCOS, color-sequential LCOS, and micro-electro mechanical systems..."
HIMX has held a Piotroski F Score of 9 since February 8th 2013. From February 8th 2013 to today, July 22nd 2013, HIMX is up 138%. I am very bullish on HIMX because of their strong sales and income growth, perfect Piotroski F score, competitive and growing yield, potential for future growth, and because of the recent buzz surrounding the company.
HIMX currently hold a PE of around 21.2 and pays an annual dividend of 25 cents. Shares are currently trading for 6.74 so the dividend yield comes out to a solid 3.71%. HIMX already went ex-dividend for the year. I consider the PE to be low due to the rapid expected EPS growth in the future. In 2012, HIMX recorded an yearly EPS of $.30 and according to Yahoo finance, analysts expect the 2013 EPS to be $.44 and the 2014 EPS to be $.62. Ninety days ago these estimates were .40 and .57, respectively, so there have been some recent upward revisions. I expect these estimates to be revised much higher in the coming days due to recent news... On June 16h seeking alpha contributor Karl Guttag wrote that he is 100% confident that the new Google Glass product will use HIMAX's microdisplay. On July 22nd that assumption proved correct. According to seeking alpha contributor Mark Gomes Google will "invest in a Himax display, a subsidiary of HIMX. The deal is explicitly intended to fund LCOS microdisplay production capacity at HIMX. Under the terms of the deal, Google will hold a 6.3% of HDI and have the option to more than double it to 14.8%."
This new deal will provide HIMX with substantial revenue and earnings growth in the coming years. It will also open many doors as companies will look to HIMX as a production partner due to their involvement with a company like Google and an innovative, futuristic product like Google Glass. Since the deal was just announced it is unclear how much revenue will be affected, but we can assume it will raise revenue by a minimum 30%. We can make that assumption because in the deal, HIMX will "double its LCOS capacity from around 2 million to 7 million" according to Mark Gomes.
Let's assume by the end of 2014 HIMX holds the same price to sales ratio of .66 than it does now. Assuming that trailing 12 month revenue will be at least 30% greater at the end of 2014 than it is now, the price of HIMX could be trading around a minimum $9 at the end of 2014. Obviously, this is more of a guess than anything, but in reality there is a good chance we could see HIMX double or even triple from where it is now in the coming years.
Now that we have discussed future performance, lets look at past performance. From 2011 to 2012 HIMX has experienced sales and Net Income growth of 16.5% and 480%, respectively. Sales growth from 5 quarters ago to 1 Quarter ago was 12.6% and sales growth from 6 quarters ago to 2 quarters ago was 17.5%.
Since the beginning of the year shares of HIMX have soared 180% due to the possibility of being the microdisplay provider for Google Glass, increasing its annual dividend from 6 cents to 25 cents, and strong sales and income growth. Now that the deal with GOOG is confirmed we have seen HIMX soar 30% since July 19th, 2013.
I believe HIMX is poised for a very big run in the near future. Excellent past performance, combined with a perfect F score of 9, combined with recent news that HIMX will be production partners with Google are the perfect ingredients for heavy institutional and individual demand for the stock. It is unclear how much increased demand will affect the stock price, but for HIMX the sky is the limit.
Other companies that currently (July 22nd, 2013) hold a perfect F-Score of 9 include:
Technology: Danaher Corporation(DHR), Western Digital Corporation(WDC), SanDisk Corporation(SNDK), Jack Henry and Associates, Inc.(JKHY), Internet Initiative Japan Inc.(IIJI), Benchmark Electronics Inc.(BHE), Himax Technologies Inc(HIMX)
Services: Groupo Televisa SAB (ADR)(TV), H & R Block Inc.(HRB),Vail Resorts Inc(MTN), Ituran Location and Control Ltd.(ITRN), GannettCo. Inc.(GCI), Foot Locker Inc.(FL), Dillard's Inc.(DDS), SunCokeEnergy Inc.(SXC), Consolidated Graphics Inc.(CGX), USA Mobility Inc.(USMO)
Consumer Non-Cyclical: Green Mountain Coffee Roasters Inc.(GMCR)
Basic Materials: Babcock & Wilcox Co(BWC)