Today’s recommended stock provides embedded processing solutions for automotive, networking, industrial and consumer markets worldwide.
Freescale Semiconductor (FSL)
from Cabot Top Ten Trader
While Freescale Semiconductor (FSL) has some growth stock characteristics—it is a chip stock after all—the big idea here is that this good-sized firm ($4.2 billion in revenue) is in the midst of a big turnaround, as management slashes debt, grabs market share and boosts margins and earnings.
Freescale makes chips for all sort of industries, though automotive has been its largest market lately, and a recent upturn in its business has allowed management to begin paring back its huge debt load (which, in turn, will help earnings by cutting interest expense). In fact, a follow-on stock offering by the company that was used to pare debt was greeted enthusiastically by investors, who see big earnings growth ahead.
Fourth-quarter earnings and the first-quarter outlook topped expectations, and analysts see this year’s bottom line more than tripling, with another 36% gain in 2015. Of course, in a cyclical industry like semiconductors, the environment can change in a hurry, but the recent acceleration in revenue growth, market share gains and management’s progress in restructuring the balance sheet is all to the good.
As turnaround stories go, we think Freescale can go far if the wind remains at the industry’s back. In this environment, it’s important to find early-stage opportunities that have shown great upside power, and FSL is a perfect example of that.
After coming public in mid-2011 and doing zilch through January 2014, the stock exploded higher, first on earnings, and then on a debt restructuring/share offering plan, which saw the stock surge 9% in mid-February on 12 times average volume! It meandered higher after that, and the recent retreat has been mild given the prior advance. FSL looks buyable here or on weakness, with a stop near the 50-day line near 19.
Suggested Buy Range: 21-22.5
Suggested Loss Limit: 19-19.5
Michael Cintolo, Cabot Top Ten Trader, www.cabot.net, 978-745-5532, March 17, 2014