The head of technical analysis at Oppenheimer, Ari Wald, is bullish on Skyworks Solutions (NASDAQ: SWKS). He cites that technology is currently leading the market rally and in particular the semiconductor space. To end up deciding on Skyworks Solutions as their stock choice, his team at Oppenheimer developed a top down guide to stock picking. The steps to this guide are as follows.
- Step #1: What sector should you own?
- Step #2: Where in that sector are the best performers?
- Step #3: What stock is the best one to buy?
We already noted that the sector to own is technology, according to Wald. From there, he broke down the sector to note that the semiconductor space is where you want to be investing in, the best preformer. The third step is determining what stock to buy.
Wald uses a technical analysis approach to picking stocks and this led him to Skyworks Solutions. He noted that the stock has been underperforming relative to the sector and this makes it an attractive buy. But there is more to the story with Skyworks Solutions.
Who Is Skyworks Solutions?
The company, based in Woburn, Massachusetts, is a semiconductor manufacturer that makes chips for mobile devices. If you own an iPhone or Galaxy, chances are there is a Skyworks Solutions chip in the phone.
In the summer of 2015, the stock was doing well and reached an all-time high. But then reports began to surface that consumers were buying fewer smartphones and tablets. Since the majority of the company’s business is tied to this market, the stock price suffered. It dropped from over $100 per share down to $66 per share.
Outlook For 2017
So far in 2017, the stock has rallied 33% to over $98 per share. Even with this rally, the stock is trading at just 11 times price to earnings ratio based on forward looking estimates.
The company released its targets for the first quarter and expects revenue to increase between 7-9%. The remaining question then, is if you should get in on this stock or not.
Skyworks Solutions: A Hold
Right now I would hold off on buying this stock. While the selloff after the summer of 2015 was over exaggerated, so too has been the rally. Many investors saw the steep selloff and jumped in, pushing shares higher. The stock is close to its all-time high again and consumers are still not buying many tablets and are keeping their smartphones longer still.
But there are bright spots for the company. First, free cash flows continue to rise, mainly due to cost cutting initiatives. And then there is the Internet of Things. While still mainly a chipmaker for mobile devices, Skyworks and other chipmakers are entering into the Internet of Things landscape.
This industry is expected to explode in the coming years as we connect more and more things to the internet. Think things like cars, home lighting, thermostats, etc. As these devices need to get internet connectivity, they need a chip in them. This is the future growth for Skyworks Solutions.
While this explosion is still years away, the stock is reflecting it is here now based on price. As of this writing, the company relies on mobile devices too much to warrant its current valuation. If sales of mobile devices were to rise, then the price would be a more accurate reflection of fair value.
However, the company is a solid option for a long term play, given the potential of the Internet of Things. But you have time to wait for a better price point before jumping in.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.