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I tend to favor a contrarian style when picking individual stocks. I typically look for things that have performed badly, but where the selling has gone way past the logical endpoint. Either something that got caught up in a general or sector-specific selloff but that has solid fundamentals, or something where the conditions that caused the bearish sentiment are changing or about to change. That works well in markets where the overall sentiment is bullish; the retracement in those conditions will come at some point and includes an element of a short squeeze that can exaggerate gains on the way back up.
What is known as momentum investing, buying high and selling higher rather than looking to buy low, on the other hand, can often be a better tactic during or immediately following a bear market. The logic here is that something that has shown significant gains in tough conditions will really fly when things improve, no matter how much is has soared already. That is why right now, while there are plenty of big tech and other stocks that can be expected to bounce back at some point, I am looking at one of the best performing stocks so far this year, Axcelis Technologies (ACLS).
When looking at something like this, I look for more than just momentum. If the buying is not backed by a strong fundamental case, or if it has taken the stock to a point where the P/Es are sky high and an adjustment looks inevitable, it would be of no interest. Neither of those things applies to ACLS at the moment.
The fundamental case is strong. Axcelis make capital equipment for the semiconductor industry, and therefore fits into another of my common investing themes, what I call the “picks and shovels” approach. That is based on the fact that the companies that made the most money, and most consistently, in the various gold rushes in the eighteenth and nineteenth centuries were not the prospectors, but the suppliers of the picks, shovels, and pans that every prospector needed. They made a profit whether an individual struck gold or not.
There is a gold rush of sorts in the semiconductor industry, as microchips become a part of seemingly everything made. If you had said the words “smart refrigerator” just a few years ago, you would have been laughed at. But now the idea of appliances and other goods with computing power and connectivity is not funny; it is fact. That has led to a massive increase in demand for chips, and the industry has struggled to keep up, especially in the face of the pandemic. They will be playing catch up for years to come, and ACLS will benefit from that, no matter what happens to chip prices or individual manufacturing companies in the space.
The fundamental case for ACLS is solid, but it is also well-known, which often leads to the second problem — overvaluation. Indeed, if you look at the six-month chart above on its own, you would probably assume that that was the case here. You would be wrong. The big jump in the stock has not come as a result of speculation, but a fundamental readjustment to the reality of massive demand, and it may well be that the market still hasn’t caught up.
At the end of Q3, Axcelis reported a $1.1 billion order backlog, its highest ever, and with positive free cash flow and cash on hand representing around six times the debt on their books, they are in a good place to go about addressing that this year. Even before any investment, though, the stock already offers a rare thing in the current market, impressive growth. Last quarter’s earnings showed revenue growth of around 26% compared to the same quarter last year and EPS growth of over 46%.
Given all that and based on what we have seen from tech stocks with solid growth in the past, you can be forgiven for assuming that ACLS’s P/E would be triple digits or close to it, but that isn’t the case. Rather, the stock has a very reasonable trailing P/E of just under 21.
At first glance, ACLS looked like the kind of stock I usually avoid; something that I’m too late for, when all the value was long gone. However, after a deeper look at their growth and prospects and considering some basic valuation measures, it appears that what we have seen over the last few months is just the beginning, and the stock can be expected to continue offering gains, regardless of overall market conditions and is a buy, particularly on any pullback.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Image and article originally from www.nasdaq.com. Read the original article here.