MMS - ChipMOS Technologies: The Billion Dollar Stock You Probably Never Heard Of

2023-03-21 07:36:21 ET

Summary

• Technology stock outperforming the S&P.
• ChipMOS Technologies enjoys price and earnings momentum.
• The next semiconductor buying cycle is on the way.

The latest banking crisis is doing its best to suck all the air out of the room, but by listening to the negativity you are missing the opportunities presenting themselves in the market.

Ironically, the sector whose vulnerability has wobbled the banks, is the one sector that has maintained the run of good form from October of last year.

The technology sector (XLK) has seen a rapid acceleration in its outperformance against the S&P, particularly for the month of March.

The Candidates

So, we have the sector, now for the stocks. I’ll use Seeking Alpha’s undercovered stocks from March 23rd as a filter. I wanted to avoid any penny stocks, or stocks well off their highs, so this gives a list of potentials:

From this list we have four clear winners, Asure Software Inc., Altair Engineering, Novanta and ChipMOS Technologies. These are stocks which are continuing to perform despite their apparent lack of attention - stocks doing their thing quietly in the background. We shall award each of these stocks 1 point.

Price Momentum

Most chartists will look to a typical OHLC or candlestick chart, but price momentum is often best represented by a point-n-figure chart. A point-n-figure price does not use time as its x-axis, but instead uses price direction; switching between “X”s when price is rising, and “O”s as price falls. The switch from “X” to “O” is determined by a consecutive 3-square move up or down in price.

What we want to see is a stock in a bullish trend, and preferably with a bullish point-n-figure pattern. Stocks in a point-n-figure uptrend are Maximus, Altair Engineering, CTS Corp, and CGI Inc. We shall award each of these stocks 1 point.

In terms of the point-n-figure bullish patterns; these are patterns which run alongside the underlying trend; you can read more about point-n-figure chart patterns . Here, we will award +1 for a bullish pattern, and -1 for a bearish pattern. Bullish patterns can be found for Altair Technologies, Asure Software, ChipMOS Technologies, and Silicon Motion Technology Corp. Bearish patterns are found for Maximus Inc, Hackett Group, and VeriSign Inc.

Coverage

The twelve candidates cover an interesting mix of company stature, we have a stock like Asure Software with just a $275 million market cap and fewer than 500 employees, to CGI Inc and its $21+ billion market cap and nearly 100K employees.

What’s of interest to us are stocks which have low coverage by both Seeking Alpha authors and Wall Street Analysts. ChipMOS Technologies has no recent coverage - last October was its last featured article on Seeking Alpha, with Maximus and Novanta only having minimum Wall Street coverage, so I’ll award each of these stocks 1 point.

Earnings per Share

We want to stick with stocks which are showing strong earnings growth potential. This 10-year track of earnings performance clearly has its winners. Leading the bunch is VeriSign, but more recently, Silicon Motion Technology Corp has seen an earnings acceleration. CGI Corp has seen slow-and-steady earnings growth. Maximus has done well, but recent performance has dipped. I will award the first three stocks mentioned here 1 point for their EPS growth.

On the flip side, we want to stay away from struggling companies. Asure Software Inc. has been trending down along with Altair Engineering, so I will give each of these stocks -1 point.

Return on Equity

If we consider return on equity, we ideally want to see figures up around 20%. This reflects a company which is managing its equity capital well and is offering a strong return to shareholders.

Only one stock, Silicon Motion Technology, has a current return on equity of over 20% (at 24.82%) with honorable mention to CGI Inc just below 20%; each of these stocks will score a point.

Two stocks, Altair Engineering and VeriSign, have seen return on equity struggles over the last decade, the latter stock in particular. Because of this, each of these stocks gets a -1 score.

Dividends & Debt

There are two other factors I like to look for in a stock; a stock which pays a dividend and a stock which carries no debt.

Of the twelve stocks, only three pay a dividend. Hackett Group has a dividend yield of 2.5%. ChipMOS Technologies has a current yield of 12.3%, that is likely to be reduced, but has an average 4-year yield of 5.8%. Maximus has a yield of 1.5% and CTS Corporation just a measly 0.4%. Given that, I would award 1 point to the aforementioned stocks, bar CTS Corporation.

When it comes to debt, ideally, you don’t want to see stocks carrying excessive debt and should have a debt-equity ratio of less than 1.0 (100%). The only stock with no debt in this list is Silicon Motion Technology, so I will give this a point. Two stocks have a debt-equity ratio above 1.0: Hackett Group and Maximus, so each of those will score -1 by my considerations, although the ratio is not excessive by general standards.

Points Tally

If we tabulate our scoring by the different metrics, we have two stocks tied at four points each: Silicon Motion Technology Corp and ChipMOS Technologies.

And the Winner is…

It’s a tough call to split between the two stocks, but I’m inclined to go with ChipMOS Technologies. The long term price action shows a healthy support level around $20 and a well defined resistance zone around $38-40. While it may take a number of years to get back to challenging $40, the extent of its decline and the general lack of coverage in the media makes this is a bit of a sleeper play.

The semiconductor sector, as tracked by the Philadelphia Semiconductor index, has been quietly performing despite the tricky environment.

The sector has experienced a bit of a roller coaster move. The onset of Covid created the first wave of pressure as chip scarcity was a problem as production came to a halt. Then there was the surge in demand for tech devices as workers moved to a work-from-home system, stretching resourcing and adding consumer pricing pressure. As the pandemic eased, the increase in demand for devices eased as everyone who wanted a new phone or laptop now had one and the sector stalled out. Now we have the added pressure of the Fed’s fight against inflation, leaving an environment that couldn’t be more challenging.

However, the sector has weathered the storm. At its core, there is a good balance between copper prices and the semiconductor index; copper prices are below the highs of 2021 and are running alongside gains in the underlying semiconductor index; it’s when prices diverge that concerns arise, but this is not the case now. The hybrid work environment looks here to stay, and in the coming years we will start to see how the upgrade cycle evolves from workers who bought new equipment at the start of the pandemic. ChipMOS Technologies also reported its first month-on-month revenue increase since June 2022, another sign that market conditions may be improving.

Within the sector, there is reason for optimism as Applied Materials delivered a large hike in its dividend: “The dividend increase, our largest in five years, and the new share repurchase authorization reflect our positive long-term view of the semiconductor market and our confidence in Applied’s outsized growth opportunities driven by our technology leadership, broad portfolio of differentiated products and strong customer engagements,” said Gary Dickerson, President and CEO.

If there is a concern, as a Taiwanese company, the political situation with China adds an unwanted level of uncertainty to the long term outlook for the company. Taiwan does have significant semiconductor exposure and is responsible for 40% of the country’s exports. Inflationary pressures on demand from US and European consumers is reflected in a relatively tepid GDP outlook for the country. However, I do think most of this weakness has been priced in the stock.

You won’t find much said about ChipMOS Technologies, but this stock looks like a winner.

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