Why I Like It
This is a small cap stock in a “risk on” environment.
Small cap stocks have been out-performing of late.
Revenue trends are pointing to continued sequential growth.
Solid History of beating the Zacks Consensus Estimate.
In a sector that has been super hot all year (semiconductors).
The Recent Numbers
I like to do a review of the most recent quarter for stocks that I highlight as Bulls of the Day. AXTI reported the June 2016 quarter back in late July, so we are a month away from the company reporting the September quarter.
The most recent quarter was a beat on top and on bottom. The company posted EPS of $0.03 when the Zacks Consensus Estimate was calling for $0.01. Revenue came in $1M above expectations for a 2.6% positive revenue surprise. As a result, the stock was bid up by 3.85% in the session following the report.
AXT Inc., designs, develops, manufactures and distributes high-performance compound semiconductor substrates, as well as opto-electronic semiconductor devices such as high-brightness light emitting devices, and vertical cavity surface emitting lasers.
The company has a good history of beating the Zacks Consensus Estimate. There has been one miss since 2013 and that means a truckload of beats. The miss was the December 2015 quarter and Wall Street didn’t even punish the company as the stock was only down 1.5% in the session following the results.
The following quarter was a solid beat of $0.02 for a 100% positive earnings surprise. The company also beat on top and Wall Street praised the news. Shares of AXTI were up more than 16% in the session following that beat. After the most recent beat in July, shares were higher by just 3.8%, but still going in the right direction.
The estimate picture is a thing of beauty, with the Zacks Consensus Estimate for 2016 moving from a loss of five cents back in April to a gain of $0.08 in July and is now at $0.13. That is the sort of positive momentum that you have to love to see.
The 2017 number is also moving higher, going from a gain of $0.05 to $0.12 to $0.18 over the same time period as mentioned above.
Investors have to pay up for this play in terms of forward PE, but no so much in terms of other metrics. AXTI has a 35x forward earnings multiple compared to a 23x multiple for the industry average. The price to book of 1.1x is well below the 2.7x industry average and we also see the stock trading at a discount in terms of price to sales. The company has a 1.9x price to sales multiple while the industry average trades at about 3.1x.
I see this stock having less revenue growth than the industry average this year, but will beat the industry next year. As far as earnings growth goes, AXTI is surpassing the industry average for this year and next as well.
Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color-coded lines represents analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #1 (Strong Buy) we see that estimates are moving higher.
Now, which stocks should you sell?
As a Zacks Rank #1 Strong Buy, this Bull of the Day deserves consideration. But today there are 220 Zacks Rank #5 Strong Sells that demand even more urgent attention. If any of these are lurking in your portfolio, they should be removed immediately. Since 1988, such stocks have actually performed more than 11X worse than the S&P 500. See all Zacks Strong Sells and Strong Buys absolutely free >>.
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