Every week - time permitting - I will publish articles here, exclusive to SA readers - providing what I believe are the top-most stocks within four distinct sectors I follow - technology, industrial, healthcare, and consumer discretionary. In this specific article, I will focus purely on technology stocks.
Every stock included within these articles are thoroughly researched to the best of my ability, and combine both key fundamentals, and some technical analysis (specifically price/volume activity)...
The objective of this method is to combine both fundamental and price/volume activity towards identifying quality companies which are potentially under accumulation (usually the early stages of a trend). Practically, a 'qualitative' watchlist of all NYSE/AMEX/Nasdaq listed stocks, above a $50m market cap is maintained, for each of the four sectors mentioned above. Each stock within a watchlist passes a strict, fundamental screening criteria, as follows...
- U.S. Listed Stocks Only (No OTC, or Non-U.S. Domiciled Companies)
- Market Cap Above $50m
- Average (90 Day) Volume Above 5000
- Improving Sales Revenue
- Improving Gross Profit Margin
- Improving Operating Margin Growth
- Healthy Operating Income to Enterprise Value Ratio (Minimum 3%)
- Healthy Free-Cash-Flow to EV (FCF/EV) Ratio (Minimum 3%)
- Low Debt-to-Capital Ratio (Less Than 50%)
- Strong Recent Volume Activity, Relative to Average Volume
Applying the above screen rules results in a 'watchlist' of quality stocks with positive, qualifying fundamentals (minimal criteria). The list is then ranked (sort-ordered) by the value metric FCF/EV yield, from highest to lowest (the higher the FCF/EV ratio, the more potentially undervalued the stock). The underlying strategy is to watch these stocks closely, especially during strong price reversals/continuations backed by strong relative volume, which often triggers a continuation of the trend. The current top three stocks from the technology sector are discussed in more detail, in the balance of this article...
Screen Date: 16th May 2018 Pre-Open
Focus: Technology Sector...
Top 3 stocks:
(1) Western Digital Corp. (WDC)
(2) Xcerra Corp. (XCRA)
(3) Vishay Intertechnology (VSH)
Western Digital Corp
Data storage/solutions company Western Digital (WDC) has had a bit of a rough ride lately, with the share price closing last night at $82.98, significantly below the heady heights of only a few weeks ago when it was trading above $105 (mid-March). The stock is currently making a strong (volume backed) come-back, with a $9+ swing in the past couple of weeks, establishing a then firm support/bottom at $76.60 (a similar price support, or pre-double-bottom was established in early December 2017). The company boasts strong fundamental credentials, and is a strong buy at current levels, as the price is in positive momentum, with strong volume.
The most recent quarter reported sales growth of 7.8% (relative to the same quarter a year ago), gross margin 'growth' of 8%, and operating margin growth exceeding 48%. Operating income to enterprise value currently stands at 11.9%, while free cash flow to EV (FCF/EV) is at a healthy 9.4%. The company has a reasonable debt-to-capital ratio of 49%. There is solid upside in the stock price of WDC in my opinion. This is backed by a relative volume over the past four days exceeding 114% of the 90-day average daily volume.
The semiconductor test and handling equipment provider Xcerra (XCRA) continues to trend higher, for good reason, with Cohu on its tail to potentially acquire. The stock price closed Tuesday at $13.55 and has trended higher from the late Feb lows of around $9.80, with only one medium correction during the third week of April. Consensus target price from a cross section of analysts puts the price at $14.80, making it a continuing strong buy.
The company shows strong fundamental credentials, as the price is in positive momentum, with strong volume. The most recent quarter reported sales growth of 37.6% (relative to the same quarter a year ago), gross margin growth of 4.6%, and operating margin growth exceeding 346%. Operating income to enterprise value currently stands at 10.9%, while free cash flow to EV is at a healthy 8.9%. The company has a near-zero debt-to-capital ratio (less than 1%). There is a high probability of continuing upside in the stock price of XCRA in my opinion. This is backed by a relative volume over the past four days exceeding 166% of the 90-day average daily volume.
Shares in semiconductor and passive components manufacturer Vishay Intertechnology (VSH) is moving positively in leaps and bounds - seems buyers can't seem to get enough, as the stock price has surged from around $18 to last nights $21.65 close, in 8 daily bars since May 4th. While I expect some temporary correction, I am buying on dips here, as I firmly expect this business to continue growing stronger.
The company exhibits strong fundamental credentials, as the price is in positive momentum, with strong volume. The most recent quarter reported sales growth of 18.2% (relative to the same quarter a year ago), gross margin growth of 5.4%, and operating margin growth exceeding 33%. Operating income to enterprise value currently stands at 16.5%, while free cash flow to EV is at a higher-than-average 6.9%. The company has a low debt-to-capital ratio of just over 18%. While a small correction is due, buying on dips offers great value for this stock which I believe will continue medium-to-long-term with significant upside. Relative volume over the past four days exceeds 163% of the 90-day average daily volume, further underpinning current accumulation.
More articles to follow, focusing on Industrials, Healthcare, and Consumer Discretionary stocks, based on similar screening/value methods.
Disclosure: I am/we are long WDC, XCRA. 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.