Shares of Skyworks Solutions Inc (SWKS) are down 33.44% since peaking on July 19, 2018, and in my opinion, the shares of this semi-conductor manufacturer are a screaming buy at current price levels. The company has a strong history of generating impressive earnings growth, and the future growth ratios point to continued growth over the next twelve months. I lay out my bullish argument for the company below by reviewing some pertinent fundamental and technical aspects of the stock.
Momentum Growth Quotient
My Momentum Growth Quotient (MGQ) plays a critical part when it comes to determining if I am going to go long or short a stock. Generally, I only want to go long a stock with an MGQ higher than that of the S&P 100, and I want to go short a stock with an MGQ lower than that of the index (for a more detailed explanation of how I calculate the MGQ, please see my blog post).
As of the end of October 2018, the MGQ for the S&P 100 was 9.21.
The current MGQ for SWKS stands at 13.57, which implies a 49.55% higher growth rate compared to the S&P 100. This tells us that SWKS has strong future growth potential and is a good candidate for a long position.
Let's dig a little deeper into the financial data to get a better feel for how the company has performed on certain fundamental metrics and what these numbers imply for future growth.
Caveat Lector: I am Quant Trader - that is, I seek to understand market behaviour by using mathematical and statistical modeling, measurement, and research. So, you won't find much qualitative analysis in my work or in my trading process. The goal is to identify optimum entry points for trades based on my quantitative model and execute those trades as effectively as possible.
During the past 12 months, the average EBITDA per Share Growth Rate of Skyworks Solutions Inc was 9.30% per year. During the past 3 years, the average EBITDA per Share Growth Rate was 12.10% per year. During the past 5 years, the average EBITDA per Share Growth Rate was 29.90% per year. During the past 10 years, the average EBITDA per Share Growth Rate was 30.00% per year. Earnings growth has been outstanding over the last 10 years.
The operating margin % for SWKS stands at 33.71%. Each dollar of revenue the company generated brought in 33.71 cents of earnings. The company has been able to grow its operating margin at an average clip of 11.60% per year over the last five years - an excellent growth rate for margins.
Knowing how a company has performed in the past is important in order to evaluate management's past record in running the business. But more important to us is how profitable the company will be in the future because we are investing going forward, not backward. And it's the forward-looking metrics that should really get you excited about SWKS.
I like to use two measuring sticks to gauge the future growth potential for companies: forward P/E and forward rate of return.
I prefer to use the forward P/E ratio (current stock's price over its "expected" earnings per share) rather than historical P/E to gauge a company's expected future earnings power. A high forward P/E ratio means that investors are anticipating higher growth in the future and are willing to pay more for future earnings - momentum investing is all about following the trend (perceived or real).
SWKS has a forward P/E of 9.51 compared to a 17.10 forward P/E for the S&P 100. The forward P/E for SWKS is lower than that of the index, suggesting that the market is expecting a slower growth rate for the company than the broader markets, but I view any forward p/e above 10.00 as acceptable for a long position (close enough).
The forward rate of return for a stock (created by Donald Yacktman) is one of my favorite quotients for gauging the market's expectation for future growth for a company. Yacktman defines forward rate of return as the normalized free cash flow yield plus real growth plus inflation. In simple terms, the forward rate of return can be thought of as the return that investors buying the stock today can expect from it in the future.
The forward rate of return for SWKS stands at 24.55%. This implies that an investor buying the stock today should expect a 24.55% return over the next 12 months. The average forward rate of return for the S&P 100 as of the end of October was at 8.03%, so SWKS has an implied potential rate of return that is 3.05x greater than that of the index.
The risk inherent in the forward rate of return is that the calculation is reliable only if the company can grow at the same rate in the future as it did in the past. If the growth rate falters, the projected returns will not materialize. But we are willing to accept this risk as part of the difficult process of forecasting earnings and growth momentum.
As per my ChartMasterPro Daily Trade Model, there is a high probability of a rally to the $78.00 level from here, which would equate to a gain of 15% for the shares:
- A positive divergence has been forming in the RSI 14 since November 13 (bullish momentum signal)
- The shares should find strong support at the $68.00 level (a support level that goes back to September 2016!).
- The MACD convergence lines are coming off an extreme oversold position and are now positive (bullish momentum signal).
I will buy call options for SWKS to participate in the anticipated run to $78.00. For investors in the shares, I recommend that you hold for three months or $78.00, whichever comes first. For longer-term investors, I believe SWKS is a solid addition to any growth portfolio over the next 12 months.
When looking for companies to invest in, I like to find management teams that have outperformed their peers in the same industry with regard to running the company efficiently and generating higher than average returns for shareholders.
|Gross Margin TTM||50.43%||44.80%|
|Net Profit Margin TTM||30.02%||21.22%|
|Operating Margin 5-Yr Average||32.28%||16.38%|
Return on Equity TTM
This is a company that's posting a much higher profit margins than its peers with a management team that's very good at generating higher than average returns on equity than its competitors. The price drop in the shares over the last five months presents an excellent opportunity to initiate a position in SWKS.
The chart below shows the company's revenue on a TTM basis - you can see that although revenue is still increasing though 2018, the share price has dropped dramatically for the year. With the company's long history of being able to convert rising revenue into earnings in an efficient manner, the recent pullback in price is an golden opportunity to pick up these shares on the cheap.
When I go long a stock, I want to invest in a company that provides superior future growth potential, but I also want to time the entry into any position to try to maximize my return.
So, I use fundamental analysis to identify shares with a strong future growth rate, and then I apply technical analysis to identify ideal entry points.
In my opinion, SWKS is a compelling buy at these levels from both a fundamental and technical perspective.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SWKS over the next 72 hours. 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.