2016 has been a trial for stocks in general and technology stocks in particular.
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As of mid-February, the technology sector of the S&P 500 was down over 10% year-to-date. While not quite as bad as the recent 14% decline among Financials, it wouldn’t be considered good, either.
Heck, even the energy sector was down “only” 7% over that same time frame.
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Of note has been the early 2016 takedown of numerous tech favorites that were the Chosen Ones in 2015 as the market breadth narrowed, leaving a few winners–I’m looking at you, Amazon (AMZN) and LinkedIn (LKND) while the rest of the market was already edging toward bear territory.
But as difficult as the recently concluded fourth quarter earnings season has been for some investors, quality has a way of asserting itself.
We believe the following three companies have the strength to navigate the turbulence better than others. (Note that while these are all small capitalization stocks, they all have analyst coverage from Wall Street investment banks and all have well over $1 million in daily trading volume.)
Insperity (NSP); Market Cap: $1.1B
Insperity is a human resources firm that currently has over 153,000 ‘work site employees’ performing various tasks for its clients, including payroll administration, workers compensation programs and regulatory compliance.
Insperity actually ‘missed’ fourth quarter analyst estimates when it reported on February 12. But this was due to several non-repeating expenses.
Meanwhile, the company returned over $250 million to shareholders in 2015 via share buybacks and dividends. And outstanding cost control allowed them to credibly issue guidance for the March quarter and the full year of 2016 that was significantly above existing estimates.
NSP shares rose about 7% the day it reported. But 2016 EPS guidance was about 20% higher than existing consensus. So there’s more room for the stock to run.
FormFactor (FORM); Market Cap: $369m
FormFactor makes semiconductor test equipment for testing memory and logic chips between the wafer-stage of chip manufacturing and their ultimate packaging.
Although some segments of the semiconductor ecosystem (PCs) are weak, other segments (smart phones, drones, action cameras, etc.) are healthy and growing.
So while it’s business-as-usual at FormFactor, the company just announced the acquisition of Cascade Microtech, which has a similar but not overlapping product set.
So the deal, which has already been approved by each company’s Board of Directors, promises significant efficiencies.
For example, while FormFactor reported $0.38 in Non-GAAP EPS for all of 2015, the company’s own calculation is that pro-forma earnings (assuming the two companies were combined for all of 2015) would have been $0.65.
And that just takes into account the overlapping cost and tax synergies of the deal – not any future savings from eliminating overlapping R&D and sales efforts.
Meanwhile FORM shares have hardly budged since the deal was announced, leaving plenty of time to do your own research.
Advanced Energy Industries (AEIS); Market Cap: $1.1 billion
Advanced Energy makes precision power equipment used by others in the manufacture of semiconductor, solar panel and others high technology end-products.
Even though the semiconductor industry overall has been in a cyclical downturn, AEIS has managed to power through the slump with their own semi-related revenue reaching record highs for the full year 2015.
And when the company reported its fourth quarter earnings on February 1, it issued earnings guidance for the first quarter (ending March 31) of $0.40 – $0.50 per share, solidly above the existing analyst consensus of $0.38 per share.
In short, it’s business as usual at AEIS, with lots of cash generation, share buybacks and market share gains. Shares of AEIS rose only 1% on February 2, the day after it announced earnings.
Of course, February 2 was one of the many days so far this year that the overall stock market was down sharply. That kind of relative strength bodes well for AEIS shares, something investors can keep in mind as they look over the company.
Any investments discussed in this article are for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
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