By: Bill Spencer — November 22, 2021
Micro-Cap Monday - #1-Ranked Sector Propels This Red-Hot Stock
Hi and welcome...
Thanks for stopping by for "Micro-Cap Monday."
If it weren't for versatile, powerful microchip semiconductors, the device you're reading this on right now would be the world's most expensive paperweight.
In fact, it's no exaggeration to say that semiconductors are the indispensable item for the modern world, as valuable as wood, coal, cotton or spices were in days gone by.
Semiconductor components of all sizes and shapes fill the electronic gadgets that fill our world. There is no business, industry or activity that does not depend on them.
In fact, the car you drive probably holds three or four dozen semiconductor microchips. And you'll find a handful hidden within your fridge and your stove.
Needless to add, semiconductors are a gargantuan market. Statista reports that in 2020, global chip sales came to more than $466 billion.
(Click any image to enlarge)
By contrast, according to GlobalNewswire, the market for carbonated soft drinks -- an ever-present product if there ever was one -- won't reach $370 billion until 2027.
There's another reason semiconductors should be on your mind...
The "Semis" Sector Is Red-Hot Right Now
At True Market Insiders we break the market down into 45 narrow sectors. Forty one of those are "industry groups" and four of those are "international groups."
On our institutional-quality sector research platform, Sector Prophets Pro, we can easily see how those 45 sectors rank in terms of relative strength by glancing at our Sector Relative Strength Matrix.
In the image above you can see that Semiconductors (SEMI) are ranked #1.
There's more. Each sector has its own Bullish Percent Index (BPI) chart. These "internal" or "breadth" indicators show us the percentage of stocks within a sector currently trading on point-and-figure (PnF) Buy signals on their own respective price charts.
When the chart is in a column of X's the bulls/buyers (aka Demand) are in control over the short term. As you can see above, Demand is in control of Semis right now. What's more, Demand is increasing as the column of X's grows higher.
Semis Are Strong Versus the Market
Finally, when we compare the Semiconductors sector against the wider market (the Equally Weighted S&P 500) we see increasing strength as well.
The Sector Relative Strength Chart is in a growing column of X's.
There's one more important sector indicator I want you to look at, and we'll come to it in a moment.
First, we want to ask, "can we find an attractive micro-cap within the scorching Semiconductors sector?"
As it happens -- we can and we did.
Today's Mighty Micro-Cap
Pixelworks, Inc. (NasdaqGM: PXLW), out of Portland Oregon, has a market cap of $297.5 million. The company designs, develops and markets visual display processing semiconductors, intellectual property "cores," software and custom integrated circuits for high-end, energy efficient video applications.
Its critical components show up in smartphones, tablets, and projectors. It serves in Japan, China, the United States, Taiwan, Europe, and Korea
As of December 31, 2020, the company controlled an intellectual property portfolio of 338 patents related to the visual display of digital image data.
The Comeback Kid
After missing earnings expectations four quarters ago, the company improved by first meeting expectations... and then beating them, even in the face of higher guidance. (Pixelworks won't report again until February 10, 2022.)
Following the most recent beat, the giant hedge funds began to ramp up their accumulation (buying).
Over the past four quarters the big institutions have bought more than 2.25x as much PXLW as they've sold. In the most recent quarter they've bought almost 15x more.
Running the Numbers
Over the past two quarters, the company has added to its revenues versus the year ago periods. In the third quarter its revenues increased 85% year-over-year (YoY): $15.2 million in Q3 2021 versus $8.2 million in Q3 2020.
The company's gross profit margin is up more than 8% YoY -- 52.5% versus 48.5%.
Bottom line earnings per share (EPS) is up 60% -- $(0.08) in quarter three this year versus $(0.20) in Q3 2020.
PLUS, the Company finished Q3 with $67 million in cash and nearly zero debt.
The stock put in an intra-day 52-week low ($2.63) on July 27th before beginning an epic run to its 52-week high of $7.90 on August 31st. This near-vertical climb was characterized by gravity-defying gaps (purple arrows) on heavy volume (green arrows).
It fell 50% to $3.93 before retracing 42% of those losses, closing at $5.59 on Friday, November 19.
What's interesting is that PXLW started its recent retracement just as the Semiconductors sector went on Bull Confirmed status on Nov 5. Its strong Q3 earnings pushed it higher on Nov 9.
In other words, the stock does follow the fortunes of the sector it is in. Which brings me to that final important sector indicator I mentioned a moment ago.
That tool is called the Sector Relative Strength Ranking History. It shows us exactly that -- the one-year history of a sector's position among the 45 sectors that make up our market universe.
I've highlighted the top 15 spots on the chart. Notice how much time Semiconductors spends up in the top third of the rankings.
And notice the very far right edge of the chart. Those flat plateaus show that when the sector does reach the top, it tends to hang around there for a while.
How High Can PXLW Go?
Here's another look at that price chart...
If Pixelworks can retrace 100% of its recent losses the stock will reach $7.88 (the lower yellow highlighted "Fibonacci" level). That will give us a return of 41%. Not bad at all...
If it can penetrate the recent high it will have a shot at the 161.8% at $10.36 -- a gain of 85%. That's more like it...
At this time PXLW doesn't have an attractive option we can buy. So this is a straight stock play.
The good news is that many stocks do trade options. Not only that, you can actually use "options flow" to very easily figure out where the biggest investors are putting their capital.
Once you have that intel, it's a no brainer knowing where you should put your capital. (Seriously, this is an insanely accurate way to find potentially lucrative trade ideas.)
I can't go into detail here, but you can click here and watch a video that Chris Rowe and Costas Bocelli just made that will show you everything.
Until then, let me get a jump on Thanksgiving by saying how thankful I am for your time and attention.
Here's wishing you all the success in the world.
Editor-in-Chief, True Market Insiders