When you spend time scouring the market for investing opportunities, it’s pretty easy to focus on the biggest, most recognizable and most established names in any industry. It isn’t just the name recognition that makes that a logical course to take, either; when a industry in general starts to attract the attention of the broad market (namely, institutional investors), most of the initial buying push is seen among those larger names. As an individual investor, it makes sense to piggyback my investing decisions on the direction, and the focus of the big money.
The potential drawback to focusing too much on just the big boys, however is that it does exclude a major segment of the market where terrific fundamentals can still be found, along with attractive valuations. Small-cap stocks can get lost in that shuffle, however, simply because when you aren’t working with institutional-level financial resources, you really can’t diversify your portfolio as much as a mutual fund, investment bank or Warren Buffett can. Those are stocks, however, that because of their smaller capitalization, can provide long-term opportunities that may exceed those of their bigger, more established brethren. That is one of the core concepts behind growth investing, which looks, at least in part for stocks that might not be market leaders today, but could be in the years to come.
A lot of people don’t tend to think that value investing and growth-oriented strategies are compatible, but I really don’t believe that the two mindsets are mutually exclusive. Small-cap stocks are as subject to the whims of market sentiment, which means that sometimes well-run, smaller companies will get beat up just like anybody else does when market conditions turn against them. In fact, one of the arguments more conservative-minded folks make against small-cap stocks is that they often take a bigger beating than the big boys do when things go bad, simply because there aren’t as many shares in the public market to spread out the pain of a big selloff. That makes sense to some extent, but I also believe that it’s a good idea to use a small portion of your investing capital for somewhat more aggressive opportunities. That’s where I think small-cap stocks can fill a useful niche in a well-rounded investment portfolio.
Yesterday, I wrote about the semiconductor industry, highlighting hard drive manufacturer Western Digital Corporation (WDC) as a compelling value-oriented stock in that market segment. I’ve been piqued recently by the fundamental and value profile of Cirrus Logic, Inc. (CRUS), which is a small-cap, niche semiconductor stock. I say niche, because CRUS has a very specific specialization, which is providing integrated circuits for audio and voice signal applications. Their biggest customer right now is Apple (AAPL), who uses their products for iPhones, but the company is also working to expand and diversify their revenue into the Android market and seems to be making positive, if gradual headway in that effort. Take a look for yourself; I think you’ll see there could be useful opportunity to work with.
Fundamental and Value Profile
Cirrus Logic, Inc. is engaged in providing integrated circuits (ICs) for audio and voice signal processing applications. The Company develops analog and mixed-signal ICs for a range of customers. The Company offers two product lines: Portable Audio, and Non-Portable Audio and Other. The Company’s primary facility housing engineering, sales and marketing, and administration functions is located in Austin, Texas. The Company offers products through both direct and indirect sales channels across the world. The Company’s portable audio products include analog and mixed-signal components designed for mobile devices including smartphones, tablets, digital headsets, wearables, smart accessories and portable media players. Its non-portable audio and other products include analog and mixed-signal components targeting the consumer market, including smart home applications, and the automotive, energy and industrial markets. CRUS has a current market cap of about $2.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -45%, while revenue declined about -33%. That negative pattern persisted in the last quarter, where earnings dropped by -15%, and sales -11.5%. The company operates with a healthy margin profile, however that appears to be strengthening, with Net Income as a percentage of Revenues that increased to 9.28% in the last quarter versus 7.67% over the last twelve months.
Free Cash Flow: Over the last twelve months, CRUS had $262.82 million in Free Cash Flow. That might not sound like much relative to the billions of dollars that larger companies like WDC or AAPL will show; but it also translates to a Free Cash Flow Yield of 10.5%, which is healthy.
Debt/Equity: CRUS’s debt to equity ratio is 0, reflecting the fact that the company uses little to no long-term debt. The company’s balance sheet indicates that in the last quarter they had $279.11 million in cash and liquid assets, which gives them good liquidity to work with.
Dividend: like most semiconductor and technology stocks, CRUS does not pay an annual divided,
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CRUS is $19.10 and translates to a Price/Book ratio of 2.24 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.62, meaning that the stock is currently sitting about 17.5% below that average. That puts a long-term target price for the stock at about $50 per share, which is a level the stock last saw in January of 2018. The stock is also trading more than 45% below its historical Price/Cash Flow average, which lends strong credence to the idea that CRUS could be even more significantly undervalued right now that its Price/Book ratio suggests.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from $72 beginning in May of 2017, until the end of December when it bottomed around $31; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock has rallied about 30% from that low point. Since the end of February, with a pretty consistent pattern of higher highs and higher lows continuing right up to now. The stock is now just a few dollars away from immediate resistance at the 38.2% Fibonacci retracement line, which is sitting right around $47 per share, with strong support expected to be in the $37.50 – $38 range.
Near-term Keys: If you’re looking for a short-term oriented trade, and don’t mind being a bit aggressive, buying the stock now, or working with call options with an eye on that resistance level at $47 as a short-term target. If the stock breaks down and drops below $37.50, you might consider shorting the stock or buying put options, with a target price to close that trade near the trend low around $31. If you don’t mind the potential for short-term volatility, and are willing to be patient, I think CRUS is a stock that offers a very impressive value proposition – one that could yield a long-term gain of 50% or more over the next couple of years.