A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems, I used one of them the "All-Stars: O'Neil" in this article. The ranking system is based on investing principles of the well-known investor William O'Neil.
The "All-Stars: O'Neil" ranking system is quite complex, and it is taking into account many factors like; EPS Growth, Sales Growth, Industry Growth, Market conditions and Margins, as shown in the Portfolio123's chart below.
In order to find out how such a ranking formula would have performed during the last 15 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took all the 7,014 stocks in the Portfolio123's database.
The back-test results are shown in the chart below. For the back-test, I divided the 7,014 companies into fifty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the "All-Stars: O'Neil" rank. This brings me to the conclusion that the ranking system is useful.
After running the "All-Stars: O'Neil" ranking system on S&P 500 tech stocks that pay a dividend with a higher than 1% yield, on May 14, I discovered the twenty best stocks, which are shown in the table below. Since I covered the first stock of the list Lam Research Corporation (NASDAQ:LRCX) in my SA article from April 29, I will describe in this article, the second stock of the list Microchip Technology Inc. (NASDAQ:MCHP).
Astonishingly eleven companies among the twenty top ranked S&P 500 tech stocks that pay a dividend according to "All-Stars: O'Neil" ranking system, are from the semiconductor & semiconductor industry, which indicates that this industry might be undervalued.
Microchip Technology engages in developing, manufacturing, and selling semiconductor products for embedded control applications. The company is a leading provider of microcontroller, mixed-signal, analog and Flash-IP solutions. Microchip Technology was founded in 1989 and is headquartered in Chandler, Arizona.
The table below presents the valuation metrics of MCHP, the data were taken from Yahoo Finance and finviz.com.
Microchip's valuation metrics are good; the Enterprise Value/EBITDA ratio is low at 13.76, and the total debt to equity ratio is at 0.48.. According to Yahoo Finance, MCHP's next financial year forward P/E is low at 15.31 and the average annual earnings growth estimates for the next 5 years is very high at 16%, these give a very low PEG ratio of 0.96, one of the lowest among S&P 500 tech stocks. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Microchip initiated quarterly cash dividend payments in the third quarter of fiscal year 2003 and has increased its dividend 41 times since its inception. On May 06, Microchip announced that its Board of Directors has declared a quarterly cash dividend on its common stock of 35.55 cents per share. The dividend is payable on June 3, 2014 to stockholders of record on May 21, 2014.The forward annual dividend yield is high at 3.03%, and the payout ratio is at 78%. The annual rate of dividend growth over the past three years was only 1.0%, over the past five years was also only 1.0%, but over the past ten years was very high at 28.8%.
Latest Quarter Results
On May 06, Microchip reported its fourth-quarter and full fiscal year 2014 financial results, which beat EPS expectations by $0.03 (4.9%) and beat the consensus on revenues. Consolidated net sales for the fourth quarter of fiscal 2014 were $493.4 million, up 2.3% sequentially from net sales of $482.4 million in the immediately preceding quarter, and up 14.7% from net sales of $430.1 million in the prior year's fourth quarter. Consolidated GAAP net income for the fourth quarter of fiscal 2014 was $111.5 million, or 50 cents per diluted share, up 5.8% from GAAP net income of $105.4 million, or 48 cents per diluted share, in the immediately preceding quarter, and up 86.8% from GAAP net income of $59.7 million, or 28 cents per diluted share, in the prior year's fourth quarter. Consolidated non-GAAP net income for the fourth quarter of fiscal 2014 was $141.3 million, or 64 cents per diluted share, up 6.3% from non-GAAP net income of $132.9 million, or 61 cents per diluted share, in the immediately preceding quarter, and up 29.3% from non-GAAP net income of $109.3 million, or 52 cents per diluted share.
In the report, Steve Sanghi, President and CEO said:
We are very pleased with our execution in the March quarter and for fiscal year 2014. Our non-GAAP operating results were excellent and we exceeded the midpoint of our guidance in net sales, gross margin, and operating margins while setting a new record for earnings per share. The March quarter was our 94th consecutive quarter of profitability. During the quarter, we achieved 32.7% non-GAAP operating margins and we are making excellent progress towards our long-term model of 35% non-GAAP operating margins.
Competitors and Group Comparison
A comparison of key fundamental data between Microchip and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
Microchip's valuation metrics look better than those of its main competitors. MCHP has a lower P/E ratio and a lower PEG ratio.
Microchip's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.
Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.
The MCHP stock price is 0.60% below its 20-day simple moving average, 0.42% below its 50-day simple moving average, and 9.08% above its 200-day simple moving average. That indicates a short-term and a mid-term downtrend, and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.17 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 60.40 which do not indicate oversold or overbought conditions.
Analyst opinion is divided, among the fifteen analysts covering the stock, three rate it as a strong buy, six rate it as a buy and six rate it as a hold.
On February 10, 2014, Microchip Technology Incorporated and Supertex Incorporated (NASDAQ:SUPX) announced that Microchip has signed a definitive agreement to acquire Supertex for $33 per share in cash, which represents a total equity value of about $394 million, and a total enterprise value of about $246 million, after excluding Supertex's cash and investments on its balance sheet of approximately $148 million. The acquisition has been unanimously approved by the Boards of Directors of each company and is expected to close in the second quarter of calendar 2014, subject to approval by Supertex's stockholders, regulatory approvals and other customary closing conditions.
I consider the acquisition of Supertex very positive to Microchip. The two companies offer complementary products with leading market share positions in adjacent markets. There is also significant cost savings through operating expense synergies. The deal will allow Microchip to expand its sales into medical and industrial customers, and to enhanced cross-selling opportunities to further market share gains. The Supertex deal should be another successful acquisition for Microchip, which has acquired about fifteen companies over the last decades.
Microchip has compelling valuation metrics and strong earnings growth prospects, and it has a remarkably low PEG ratio of 0.96. Microchip beat Street's estimates, in EPS and revenues in its latest quarter. Furthermore, the company enters the June quarter with a good backlog position and the June quarter is normally a growth quarter for Microchip, coming off of the negative impact of the Lunar New Year on its Asia business in the March quarter. All these factors bring me to the conclusion that MCHP stock is a smart long-term investment. Furthermore, the rich growing dividend represents a gratifying income.
Disclosure: I am long MCHP, LRCX, AAPL, MSFT, QCOM, KLAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.