This stock no longer looks like a double, so our contributor is exiting the shares.
Sell: PDF Solutions (PDFS)
from 100% Letter
Updated from Investment Digest 752, December 18, 2013
Today I want to exit a position that is a perfectly good investment, but which I no longer believe will double over the next 18 months.
The stock is PDF Solutions (PDFS), our small cap play on semiconductor evolution. With a current stock price of $19.56 and an average cost basis of $21.03, we’re down 7.0%. I think holding the stock will result in an eventual gain, but not a “double” within our target timeframe. So it has got to go.
I came to this conclusion after reviewing the Q2 earnings numbers and running some projections. Revenues in the quarter were down 1% as compared to Q2 2013 and net income was down by $0.06 to $0.15 per diluted share.
While these results are not impressive, they’re actually not as bad as they appear at first glance. And honestly, they’re not the reason to sell the stock per se. If they were, shares would be down by a lot more than 3.6% today.
That’s because PDFS had over $3 million in business that will be pushed back to the next quarter simply due to timing of recognizing the revenue. That business would have meant slight growth in the quarter, which would have been better than the contraction.
What it now means is that PDFS should grow nicely in the second half of the year. Management has called for “double-digit” revenue growth, which implies at least $10.15 million in top-line growth to surpass 2013’s $101.5 million. And EPS growth should follow. But I’m not confident this pace of growth will cause PDFS’s share price to surge to $42.00 where we’d get a double.
Upside potential is closer to 30% to 50% in that timeframe if all goes well, in my opinion. And that means it doesn’t have a place in the 100% Letter.
Let’s cut PDFS today at $19.56 and look to invest in a faster growth company.
Tyler Laundon, The 100% Letter, 100percentletter.wyattresearch.com, 866-447-8625, July 29, 2014