August 21, 2015
My No. 1 Pick for an Uncertain Market
By Melvin Pasternak
As a trader, I usually look for companies that are home-run hitters in terms of earnings growth. But with great reward comes greater risk, and such companies can also strike out. In a nervous market like the current one, an earnings whiff can lead to a big drop in the stock's price.
At times like these, it can be better to go for the reliable company that consistently hits singles and doubles.
Software company Synopsys (NASDAQ: SNPS) is just such a stock. It's not flashy, but it is likely to move steadily higher, making it a great bet in uncertain times.
Synopsys has grown earning per share (EPS) at an average rate of nearly 13% a year for the past five years. During that time, shares have steadily advanced, more than doubling in price.
Founded in 1986, Synopsys is currently the world's 15th largest software company. It's a world leader in electronic design automation software, which is used to design and analyze electronic systems such as printed circuit boards and integrated circuits, and semiconductor IP. It is also a leader in software quality and security testing. Its customers include manufacturers of advanced system on chip semiconductors and software developers concerned with eliminating security flaws.
That's a booming space to lead, but Synopsys also has more than just organic growth going for it. The company has grown through acquisitions, as evidenced by a laundry list in 2015 alone, including rivals Elliptic, Atrenta and Codenomicom, the discoverer of the Heartbleed bug, as well as assets from Quotium. These purchases have helped the company consolidate its technology edge in chip design and software testing.
The company reported better-than-expected fiscal third-quarter results on Wednesday with adjusted EPS of $0.63 on $555.8 million in revenue. Analysts had expected $0.59 on $555.4 million in sales.
However, shares took a big hit as the broader market was overrun with sellers and the company lowered its full-year guidance slightly to a range of $2.76 and $2.78 from a previous range of $2.76 to $2.81. This was due to the acquisition of software security firm Coventry, which CEO Aart de Geus said is dilutive in the short term but should turn accretive for 2016.
Also boosting earnings have been the steady share buybacks. Synopsys repurchased $180 million in shares in the first half of 2015 and still has another $200 million authorized under its current share repurchase program.
Another positive sign: The company noted it had a non-cancellable order backlog of $3.5 billion at the end of 2014. That represents more than a full year of sales.
As the five-year chart shows, Synopsys' steady fundamental growth has been reflected in a gradual but persistent uptrend in the stock.
Shares bottomed just above $21 in the summer of 2011, gaining roughly 145% in four years as they ran to a new all-time high this week before succumbing to profit-taking.
The technical pattern is marked by rallies punctuated by long periods of sideways consolidation. Shares hit a high above $47 in February and, for the next several months, went into a small rectangle with support near $45 and resistance near $47.50. This consolidation was resolved to the upside, just as past consolidations have been.
In May, SNPS broke through round-number resistance at $50. After several weeks of going sideways in a very narrow trading range, they broke out to a new all-time high of $52.65 on Wednesday.
The long-term uptrend line going back to the July 2011 low currently intersects the chart near $42.50. A steep, accelerated uptrend line drawn from the October 2014 bottom near $36 currently crosses the chart near $51.
That trendline was penetrated with Thursday's sell-off. The four-year uptrend line intersects the chart near $42. However, there is strong lateral support from the consolidation early this year between $45 and $47.50. I will place my stop-loss at $44.89, below the bottom end of that range.
Analysts' high target is $60, which several reaffirmed after Thursday's sell-off. I'll set my target below that round number at $58.95. SNPS is typically not a fast-moving stock, so my time frame is the second quarter of 2016.
Recommended Trade Setup:
-- Buy SNPS at the market price
-- Set stop-loss at $44.89
-- Set price target at $58.95 for a potential 22% gain by the end of Q2 2016
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