Skip to main content

ON Semiconductor -- on a roll as it breaks out

ON Semiconductor ($ONNN) popped up on a reversal alert screen on Tuesday evening. I only publish reversal alert lists on the weekends but now and then I do find some pretty interesting picks during the week.

So let's start with the chart and we can take a look at the reversal in progress.


There is a clear breakout that has taken place over the 50-DMA and the blue trend line. The stock is now right at a resistance level at $7.25. A move above that level would take it to the resistance level embodied by the 200-DMA. These two resistance levels will be a real test of how strong this breakout actually is.

What also makes this stock interesting is the attractive valuation. Here are a few measures that make the point:
  • The PE of 13 is modest (for a semiconductor company/growth stock)
  • PEG is only 0.5 which is quite low
  • Price to Sales is also modest at 1.48
  • Enterprise Multiple of 6.39 is definitely in the value stock range
These numbers imply the stock is not over-priced. This next chart shows the quarterly revenue, income and profit margin:

Revenue has been increasing steadily and after a couple of flat quarters, income in Q3-2010 increased almost 19% over the previous quarter.

The company has $1 per share in cash which isn't bad for a $7.25 stock. Where things get a little shaky is in the area of debt. The Debt to Equity ratio is relatively high at 64 though it is good news to see that the level debt was noticeably reduced in the last quarter.

The company's primary product line is focused on providing power management ICs and discrete components to the PC, automotive, consumer, medical and aerospace industries. Essentially, their chips can integrate with any products that require a power supply. The company's focus on helping reduce power consumption should help adoption of their products. ONNN is also moving into LED lighting, a sector that has been so successful for Cree and where a little competition wouldn't hurt. This kind of diversification might be just what is needed since a dependence on the PC industry could be a near-term problem now that many analysts are claiming that PC sales have slowed. Even Intel has reduced forecasts.

In summary, we have in ON Semiconductor a stock that is breaking out but is certainly not over-priced. It is also a stock where management should try to reduce debt while trying to get EPS to increase as rapidly as sales are increasing. Finally, as we approach earnings season, we have a stock that could be susceptible to the headwinds in the PC industry.

The bottom line is that the technicals look good, the valuation looks good and all we need is the third leg of the stool: growth in earnings. A good quarter might be all this stock needs to hit new highs.

Disclosure: no positions
Labels:

Comments

Post a Comment

Popular posts from this blog

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios. For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different. The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag. What approach should the average 401K investor take? Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask: 1. Should I stop putting the regular contribution into stocks? My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets reco...
7 comments
Read more

The Trouble with Trend Reversal Indicators

Many of us use various trend reversal indicators to time our trades. Our desire is to determine when prices have changed direction so that we can ride the new trend. Why doesn't it always work out? The first reason, of course, is that unforeseen events often drive prices in unexpected directions. That is something we can't change and it often makes all of us technical traders crazy. On the other hand, sometimes an unforeseen event is a prelude to a new trend. A stock spikes up on a what seems to be a one-time piece of good fortune and soon falls back. Does it start making its way back up or does it resume a previous down trend? The conflict within trend reversal indicators is that, though they can definitely tell when prices change direction, they suffer from two problems. One, they often can't determine how significant that move in prices actually will be. Two, they are often lagging indicators. As such, they can be late in providing a signal, sometimes leading the investo...
1 comment
Read more

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what...
6 comments
Read more