Is the market’s recent surge to a new all-time high a fresh continuation signal of the long-term bull market that many thought had ended in the last quarter of 2018? It could be; the truth is that the market right now is anxious for a positive catalyst. GDP numbers released Friday morning indicated that national economic growth topped 3% for the first time since 2013, but seemed to be offset by mixed earnings reports, including disappointments from large caps like Intel (INTC) and Exxon Mobil (XOM). Trade talks between the U.S. and China are still ongoing, which means that any catalyst they might provide in the near-term is still yet to be known.
Some of that uncertainty has led certain sectors of the market to vacillate for the last few weeks, but one of the sectors that has continued to perform at a high level is the Information Technology sector. As measured by the S&P 500 Info Tech SPDR ETF (XLK), the sector is up more than 27% year to date. If you like to take a growth-centered approach to the investments you make, that means that this is a sector you should absolutely be paying a lot of attention right now, following the time-tested idea of “a rising tide lifts all ships.”
If you’re like me, however, and you prefer to emphasize value-oriented principles to find good investing opportunities, rising industries are usually areas that offer less interesting possibilities. That doesn’t mean that every stock in a sector or industry will increase in value just because the broader segment is going up, but it does make them harder to find. That’s why I was intrigued recently when my value screeners gave me a hit on a small-cap stock in the Information Technology sector.
AVX Corporation is a company that produces electrical components, instruments, and equipment for a wide range of industries, including medical, telecommunications, automotive, and transportation (locomotive) to name just a few. This is a U.S. company with a worldwide reach primarily by virtue of the fact that it has operated as a subsidiary of Japanese electronics company Kyocera since 1990. The stock has underperformed relative to the rest of the industry, however, rising only about 6% so far this year, and dropping sharply off of resistance in just the last couple of days a little below $19 per share. The stock is currently sitting just a bit above $16 per share, with strong bearish momentum that could push the stock to test its December lows around $14. Could this open up a useful value-based opportunity? Let’s find out.
Fundamental and Value Profile
AVX Corporation (AVX) is a manufacturer and supplier and reseller of a line of passive electronic components, interconnect devices and related products. AVX operates in three segments: Passive Components, Kyocera Electronic Devices (KED Resale) and Interconnect. The Passive Components segment consists of surface mount and leaded ceramic capacitors, surface mount and leaded tantalum capacitors, surface mount and leaded film capacitors, thick and thin film packages of multiple passive integrated components, thermistors, inductors and resistive products. The KED Resale segment consists of ceramic capacitors, frequency control devices, surface acoustic wave (SAW) devices, sensor products, radio frequency (RF) modules, actuators, acoustic devices and connectors produced by Kyocera and resold by AVX. The Interconnect segment consists primarily of AVX Interconnect automotive, telecom and memory connectors manufactured by AVX Interconnect or purchased from other manufacturers for resale. AVX’s current market cap is $2.8 billion.
Earnings and Sales Growth: Over the last twelve months, AVX’s earnings grew nearly 116%, while revenues decreased about -1.7%. In the last quarter, earnings and revenues were both negative; earnings declined by just a little under -7% and revenues by about -1%. The company operates with a healthy margin profile that appears to be strengthening, since Net Income over the last twelve months was 13% of Revenues, but increased in the most recent quarter to 16.7%.
Free Cash Flow: AVX’s free cash flow is adequate, but not impressive, at $162 million. That translates to a Free Cash Flow Yield of about 3.64%.
Debt to Equity: AVX has a debt/equity ratio of .0, reflecting the fact the company has no long-term debt to speak of. Their balance sheet also indicates almost $854 million in cash and liquid assets, which gives them excellent liquidity and a lot of financial flexibility to work with. It is worth noting that Cash has declined from about $1.15 billion in the last quarter of 2017.
Dividend: AVX pays an annual dividend of $.46 per share, which translates to a yield of 2.82% at the stock’s current price.
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 AVX is $13.85 per share and translates to a Price/Book ratio of 1.17 at the stock’s current price. The stock’s historical Price/Book ratio is 1.2, suggesting that stock is pretty much fairly valued at its current price. That is supported by the Price/Cash Flow ratio, which is trading nearly at par with its historical average. Where is the bargain price for AVX? Using $13.85 as a “fair value” mark means that the stock would actually need to drop to just a little above $11 to really start being considered compelling. The stock’s current momentum is bearish, but there is really no way to predict it will be strong enough to push the stock that low.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above outlines the stock’s movement over the past year. The red line traces the stock’s intermediate upward trend from late December to right now; it also informs the horizontal Fibonacci retracement lines shown on the right side of the chart. The stock is still quite a bit above the low it set in late December, but its momentum over the last few days has pushed the stock sharply off of its recent pivot high, and below the 38.2% retracement line. That is a break below major support that I think is likely to keep downward pressure on the stock price; its most immediate next support is in the $15 range, with its 52-week low around $14 the next one in line. The stock would need to break above the 38.2% line at around $17, which now marks resistance, in order to begin staging any kind of short-term upward trend.
Near-term Keys: AVX’s fundamentals are strong; for a small-cap company, I think they are compelling enough to make this a stock to keep on your watchlist. The fact is that from a value-oriented perspective, it just isn’t a compelling story at its current price. That could change if the stock keeps dropping, though and that is why I’ll keep watching it. If you’re more interested in a short-term trading opportunity, the best probability is on the bearish side. The recent break below support could be considered a strong signal to short the stock or start working with put options; but keep in mind that immediate support is only a little over $1 away for the stock, which means that any trades you make are likely to be very short-term ones. There really isn’t a useful bullish set up right now, unless the stock manages to find new bullish momentum to drive above $17 per share. If it does, you might consider buying the stock or working with call options, with an eye on the 61.8% retracement as your exit target at around $18.70.