2023-03-10 18:22:01 ET
Summary
- Since becoming public in 2020, the Allegro MicroSystems, Inc. stock price has followed a strong cyclical pattern, rising from September to Q1 of the following year.
- Allegro MicroSystems stock's cyclical performance mirrors the semiconductor industry's cyclical trends.
- The great gains of the peak season are behind us, as is the usual yearly cycle, and the indicators of an impending bear trend are there.
Investment Thesis
Allegro MicroSystems, Inc. ( ALGM ) produces and sells integrated circuits [ICs] and application-specific analog power ICs for motion control and energy-efficient systems. Since becoming public in 2020, the company's stock price has shown a solid cyclical pattern, with price increases typically beginning in September and continuing until the Q1 of the following year. The stock's cyclical performance mirrors the semiconductor industry's cyclical trends .
For investors, timing their entry and exit according to Allegro MicroSystems, Inc.'s cyclical nature is of the utmost importance. The cyclical nature of the company's business led to a surge in share price in October, which has continued unabated to this day. All in all, this meant a healthy price and total return.
Since the company's trend shows a continuous downward trajectory every March and the share bottoms out around June, I think now is the time for investors to cash out their profits in Allegro MicroSystems, Inc. and wait for the stock to bottom out in June. Current valuation indicators suggest the company is overvalued, which lends credence to my assertion that now is a perfect moment to cash out. Insiders have been selling their shares in greater numbers since last November, another indicator that it's time to cash out and wait for the next cycle to begin.
What Are The Gains?
In light of my assertion that Allegro MicroSystems, Inc. stock is very cyclical and that now is the ideal time to take profits, it is crucial to evaluate the accumulated gains. In terms of price performance, the company has a 79.31% gain over the last year and a very strong gain of about 100% over the last six months, forming the cycle's peak period. The firm's price performance over the past three months has been 41.2%, which, in my opinion, shows that the stock is losing momentum and the falling trajectory has just begun. I think the price action of 3M signals that investors should take profits now.
Seeking Alpha
ALGM is a boon if you look at how its price and total returns compare to the S&P 500 (SP500) over the last year. Both are much higher than the S&P 500, indicating that this company is far much better than its peers in this dynamic industry in terms of returns or gains.
With a price return of 69.30%, Allegro MicroSystems, Inc. outperformed the industry by a margin of about 78%, a very significant margin. Looking at these figures, the company has gained substantially in the last year, and as the warning sign for an imminent slump is on, it's worth cashing out these gains and waiting for the stock to dip around June and enter the cycle again.
Valuation
Using the relative valuation metrics, ALGM is trading at a premium, with all TTM GAAP valuation metrics significantly higher than the industry medians. To emphasize this, none of the key valuation metrics on a TTM basis is trading a premium of less than 98%. The P/E, PEG, PS, and PB are trading at a premium of 155.4%, 98.66%, 263.77%, and 238.65%, respectively.
Seeking Alpha
Further, a discounted cash flow ("DCF") model by Finbox gives an output with a fair value of $28.01 per share against the current price of 45.22. This leaves the company with a downside potential of about 39%. Considering this output, this company's upward trend in share prices is likely to shift into a downward trajectory, which I believe still justifies my thesis that it is time to cash out gains.
Insider Selling
Many shareholders keep tabs on insider transactions, as stock purchases by company executives are generally interpreted as a bullish sign that the stock price will grow soon. When CEOs sell their shares, it's a sign that they expect the firm and the stock price to underperform. While this holds to a greater extent, the latter has been happening in this company since November, which happens to fall in the peak season of this company's cycle.
On November 1st, Thomas C. Teebagy, Jr., SVP of Operations and Quality at Allegro Microsystems, sold a lot of his company stock as an insider. Jr. sold 225,799 shares of Allegro, according to a Form 4 filing from the U.S. Securities and Exchange Commission. The whole deal was worth $7,071,545. Furthermore, insiders have sold 4,986,000 shares during the past three months, totaling around $200M. I believe the rising volume of insider sales indicates the stock is entering a bear market.
Conclusion
Over time, Allegro MicroSystems, Inc. has proven to be a cyclical stock, with distinct "peak" and "dip" phases. Consistent with the cyclical structure of the industry, this trend makes sense. As a result, investors must anticipate and respond to these changes. The great gains of the peak season are behind us, as is the usual yearly cycle, and the indicators of an impending bear trend are there. From here, I'd recommend taking some profit in Allegro MicroSystems, Inc. and waiting for a downturn in the middle of June to buy this cyclical company at a discount.
For further details see:
Allegro MicroSystems: A Cyclical Stock At Its Peak Phase, Cash Out Profits