If you pay attention to the stock market, you inevitably become familiar with some of the personalities that take up space on market media to talk about it. On CNBC, for example, Jim Cramer is an ever-present commentator. Not only does he host his own “Mad Money” show in the afternoons on the network, you’ll also find him on the floor of the New York Stock Exchange each morning during the “Squawk on the Street” segment. He’s been a TV personality since 2005, when “Mad Money” first began airing in 2005.
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What’s the draw for the average investor to somebody like Cramer? He’s well educated, and a veteran of the stock market. As the manager of his own hedge fund from 1988 to 2000, he was hugely successful, posting just a single year of negative returns and finally retiring the fund in 2001 with average annual returns of 24%. He’s opinionated, energetic, and sometimes frenetic on-screen, which can be pretty entertaining at times.
His opinions about individual stocks carry some weight with the average investor, but like most “talking heads,” I’ve found over time that it’s usually smart to take his opinions with a grain of salt. It’s true that I’ve been able to use some of his commentary as a starting point for my own analysis; but at the same time, Mr. Cramer is also one of the big reasons that I have come to believe that by the time I hear about a stock in the news, most of the opportunity in the stock has already passed the rest of us by.
This week provided a great example of what I mean. During the popular lightning round of Monday’s “Made Money” segment, Cramer answered a caller question about semiconductor stock Marvell Technology (MRVL), calling it “the no. 1 5G name.” I’ll admit, that initially piqued my interest, because I do believe that most of the best opportunities for future growth in the Technology sector, including semiconductors, will come from stocks that are closely tied to the ongoing build-out and implementation of 5G wireless networking. Mr. Cramer even gave himself a pat of the back for buying it in his charitable trust “all the way down.”
Here’s where the disconnect between good, useful information and a TV personality’s commentary happens. Since the beginning of 2019, MRVL is up 63%, making it one of the star performers not only of the semiconductor industry, but the market at large. And while that isn’t a bad thing, Cramer’s comment might make it seem like the stock had been dropping and might be available right now at a discount, which just isn’t true given the stock’s big surge this year. That can only mean that he was buying it in late 2018, when the stock was dropping from the mid-$20 range to around $14. If that is true, it does mean Cramer was smart about buying a stock on the cheap when the rest of the market was selling. Whether or not there is much opportunity left for those of us who might be looking at it now, however is an entirely different matter.
The fact that it has performed so well this year doesn’t automatically mean that it’s done, of course; in fact, the stock is performing pretty well this week, pushing to new multiyear highs as of this writing. However, it does mean that the chance the stock could actually represent the kind of strong value opportunity that I’ve come to rely on for my own investing success is an entirely different question. Let’s dive in and look at the numbers.
Fundamental and Value Profile
Marvell Technology Group Ltd. is a semiconductor provider of application-specific standard products. The Company is engaged in the design, development and sale of integrated circuits. The Company develops System-on-a-Chip (SoC) devices. It also develops integrated hardware platforms along with software that incorporates digital computing technologies designed and configured to provide an optimized computing solution. Its product portfolio includes devices for storage, networking and connectivity. In storage, it is engaged in data storage controller solutions spanning consumer, mobile, desktop and enterprise markets. Its storage solutions enable customers to engineer products for hard disk drives and solid state drives. Its networking products address end markets in cloud, enterprise, small and medium business and service provider networks. The Company’s connectivity products address end markets in consumer, enterprise, desktop, service provider networks and automotive. MRVL has a market cap of $17.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings for MRVL declined by -75%, while sales increased about 9.5%. In the last quarter, both numbers were negative, earnings at -58% and sales at -11%. The negative earnings pattern has also extended to the company operating profile; over the last twelve months Net Income was -12.1% of Revenues. While this number improved in the last quarter, it is still negative at -7.3%. The improvement is interesting, and could be a positive sign; but I’m not willing to actually call it a positive unless the pattern actually increases into useful, positive territory.
Free Cash Flow: MRVL’s free cash flow is modest, at about $595.78 million over the last twelve months. That translates to a Free Cash Flow Yield of 3.41%.
Debt to Equity: MRVL has a debt/equity ratio of .23. This is a conservative number that reflects a mostly conservative approach to leverage, but given the company’s negative Net Income as well as negative earnings growth, the fact that their balance sheet shows only $571.89 million in cash and liquid assets in the last quarter versus about $1.68 billion in long-term debt, with more money going out than is coming in means that while the company should be able to service their debt for the time being, they could face liquidity problems if their profitability doesn’t improve soon.
Dividend: MRVL pays an annual dividend of $.24 per share. At the stock’s current price, that translates to minimal dividend yield of about .91%. Even a conservative dividend, however is a concern given the fact that their negative Net Income profile means the company can only maintain their dividend by drawing from available cash, or by increasing their borrowing.
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 MRVL is $10.93. At MRVL’s current price, that translates to a Price/Book ratio of 2.41. The stock’s historical average is 1.64, which suggests the stock is overvalued by about -32%. The stock is trading -28.6% above its historical Price/Cash Flow average; together, both of these metrics puts the stock’s long-term “fair value” target between only $18 and $19 per share.
Here’s a look at MRVL’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above clearly shows the stock’s upward trend since finding a bottom a bit above $14 in late December. The run is impressive, and if you’ve held a position in this stock this year, I’m not going to blame you for giving yourself a pat on the back. The stock also appears to have broken resistance this week at around $25.75 from its peak in late April. The stock’s new high puts it in territory it has seen since 2006, and from the standpoint of short-term momentum, could give the stock enough juice to test its high at that time between $30 and $31 per share. $25.75 should now act as a new support and strengthen that bullish forecast; but if the stock drops below that point, is could drop all the way to the 38.2% Fibonacci retracement line at around $22 per share in fairly short order.
Near-term Keys: Declining, negative Net Income and a negative earnings trend, with deteriorating liquidity are big fundamental red flags in my book; along with the stock’s currently overvalued state, there is simply no way that I would be willing to consider MRVL for a new long-term position at its current price. That said, the stock’s latest break above resistance could offer an interesting short-term bullish opportunity to buy the stock or work with call options; but if you do work with that signal, plan to exit the trade at around $30 per share. If you see the stock break support at around $25.75, you could consider shorting the stock or working with put options with an eye on major support at around $22 per share as the exit point for that trade.