- Keysight Technologies is set to report fiscal second quarter earnings results on May 19. Earnings and revenue are both expected to improve greatly over last year's second quarter.
- The company has strong profitability measurements while earnings and revenue growth are expected to improve in 2021.
- The stock has seen some choppy price action over the last few months, but is coming on the heels of a 5-month rally.
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The last time I wrote about Keysight Technologies (NYSE:KEYS) was last March, almost at the exact bottom in the market meltdown. I was bullish on the stock at that time and the stock has moved up almost 78% since I wrote that article. As impressive as that return sounds, it actually lagged the S&P slightly during the past 13 months or so.
To be honest, Keysight had dropped off my radar a little because the revenue growth wasn’t high enough to meet certain scans that I run. Among the drivers that led me to reach a bullish stance on the stock back then were the earnings and revenue growth. The earnings growth has remained pretty strong, but the revenue growth has slowed over the past year.
The company has seen earnings grow at a rate of 27% per year over the last three years and they grew by 13% in fiscal Q1 2021. On the other hand, revenue has only grown by 8% per year over the last three years and it grew by 8% in Q1. EPS growth, both annually and on the previous quarter, were over 30% when I wrote about the stock in March ’21. Revenue had grown by 16% annually and 9% in the most recent quarter back then.
Keysight is set to report fiscal second quarter earnings on May 19 and analysts expect improved growth on both the top and bottom line. The current consensus estimate is for EPS growth of 70% while revenue is expected to jump by 12% compared to Q2 2020. For 2021 as a whole, analysts expect earnings to grow by 18.4% and revenue is expected to increase by 14.6%.
Another facet of the fundamental analysis that caused me to make a bullish call on Keysight last year was the profitability measurements. The company has a return on equity of 29.2% and a profit margin of 24.7%. The ROE was a little higher last year at 33.2%, but the profit margin was a little lower at 24.7%.
The overall fundamental outlook for Keysight is pretty solid. The earnings and revenue growth figures are expected to improve. The revenue growth slowed a little over the past year, but it looks as though they are improving. The profitability measurements are well above average.
After 5-Month Rally, Choppy Action has Taken Over in the Last Few Months
From September 2020 through February 2021, Keysight saw its stock rally sharply. The stock jumped from a low of $90.62 to a high of $155.50 during that stretch and it only saw five losing weeks in between. Since the high in February, the trading action has been far choppier.
Looking back to various pullbacks for the stock, you can’t help but notice how the stock has used different long-term moving averages as support. We see that the 52-week moving average as support in late 2018 and then it used the 104-week moving average as support last March. I’ve had people criticize me for using a 104-week moving average, but it represents two years of weekly data and I find that more relevant than a random round number.
Right now, the stock is dancing around its 13-week moving average and it looks like it is trying to turn lower. We see that the weekly stochastic indicators had been climbing from late March through mid-April, but they have since made a bearish crossover. At this point, I wouldn’t be surprised to see the stock continue lower for another few weeks and that would likely put the stochastics in oversold territory. If we see that and if the stock gets down to the 52-week moving average, it could be a great buying opportunity.
Sentiment Indicators for Keysight are at Extreme Levels—On Both Sides
When I pulled up the various sentiment indicators for Keysight I was a little surprised that the three indicators that I watch most closely were all showing extreme readings. The buy percentage is extremely high, the short interest ratio shows higher pessimism, and the put/call ratio is extremely low.
There are 12 analysts covering the stock at this time with 10 “buy” ratings and two “hold” ratings. This gives us a buy percentage of 83.3% and the average buy percentage falls in the 65% to 75% range.
The short interest ratio is at 5.6 currently and that is almost twice as high as the average ratio. This reflects more pessimism being directed at Keysight than there is on the average stock.
The put/call ratio is at 0.45 currently with 6,392 puts open and 14,209 calls open at this time. The average ratio tends to fall in the 0.9 to 1.1 range, so Keysight’s ratio is extremely low and reflects excessive optimism from the options crowd.
Looking back to my article from last year, the analysts’ ratings are similar and so is the short interest ratio. The put/call ratio has made the biggest flip, going from excessive pessimism to excessive optimism. The ratio was at 1.4 in March of last year.
My Overall Take on Keysight Technologies
Keysight’s fundamentals aren’t as good presently as they were one year ago, but they look to be improving, specifically the revenue growth looks like it should rebound this year. As the usage of 5G technology continues to grow, it should help Keysight grow as well. The company is expanding and expediting the deployment of certain 5G services.
The sentiment toward the stock is a little concerning right now with both analysts and option traders being excessively optimistic toward the company. I wouldn’t look for a big change in the buy percentage because analysts are typically slow to change their ratings. If there is going to be a big shift, it will likely come from the options market.
The one area that concerns me the most for the short-term picture is the chart. The momentum seems to have shifted to the downside a little and I think the stock probably moves lower over the next few weeks. But as I said before, if the stochastic indicators drop down anywhere near oversold territory and if the stock gets within range of its 52-week moving average, I think it will be a great buying opportunity.
If you own the stock already, you might want to buy some protective puts to hedge against a downswing that could be as much as 10% in the next two months. If you are looking to add the stock to your portfolio, I would suggest exercising some patience and look for an entry price down below the $125 area.
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