Technology stocks resumed their bullish momentum in the Spring as the Technology Select Sector SPDR Fund (XLK) has gained 19.6% since May 12th. While investors can’t predict how long this current run will last for tech stocks, a great way to limit your losses is to focus on highly profitable tech stocks. Picking high-profit stocks can lead to substantial gains.
Studies have found that investing in profitable stocks can generate above-average returns. Profit margins can tell us how well a management team is running a business. It represents the percentage of sales that has turned into profits. While there are a few ways to look at net profits, I prefer net margin since it shows a company’s bottom line after other expenses have been taken out of revenue.
As we’ve seen over the last couple of quarters, companies are generating billions in sales. But if the sales aren’t turning into profits, then a company may not be worth buying. So, I ran a screen for technology stocks rated a Buy in our proprietary POWR Ratings systems with a net profit margin of 20% or higher. The results included top stocks such as Cadence Design Systems, Inc. (CDNS), KLA Corporation (KLAC), and Skyworks Solutions, Inc. (SWKS).
Cadence Design Systems, Inc. (CDNS)
CDNS was founded in 1988 after the merger of ECAD and SDA Systems. The company is an electronic design automation, or EDA, firm specializing in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems.
The company benefits from strength across segments, including digital & signoff solutions and its functional verification suite. CDNS is also gaining from investments in emerging trends such as the Internet of Things (IoT), autonomous vehicle subsystems, and strength in the semiconductor end-market.
The firm’s frequent product launches are expected to help it generate revenues growth over the long term. It focuses on providing end-to-end solutions, which reduces the time required to introduce a semiconductor product to the market. The company raised its 2021 revenue guidance based on its strong performance in the second quarter.
Secular tailwinds in chip design, including 5G, IoT, and AI, should increase demand for EDA tools and help support growth for the company. CDNS has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The company has a Quality Grade of A due to solid fundamentals. For instance, its net profit margin of 23.5% is much higher than the industry average of 5%.
CDNS also has a low debt-to-equity ratio of 0.1. The firm has a Sentiment Grade of B as it is well-liked by analysts. Five out of seven analysts rate the stock a Buy. We also provide Growth, Value, Momentum, and Stability grades for CDNS, which you can find here.
CDNS is ranked #20 in the Software – Application industry. For more top stocks in this industry, click here.
KLA Corporation (KLAC)
KLAC designs and manufactures yield-management and process-monitoring diagnostic and control systems (PDC) for the semiconductor industry. The systems are used to analyze the manufacturing process at various steps in a product’s development. The firm’s laser-scanning products are used for wafer qualification, process monitoring, and equipment monitoring.
The company also provides inspection tools and systems for optical metrology and e-beam metrology. KLAC is the leader in a highly profitable industry. PDC tools lower production costs and help maximize productivity for chipmakers. This makes them a critical part of the semiconductor manufacturing process.
In fact, the company KLA has the most extensive data and knowledge in the PDC market, which makes it difficult for their competitors. The firm is seeing momentum in the process control market. The transition to advanced nodes and the insertion of EUV lithography should help drive growth over the next couple of years. Plus, enhanced wafer cleanliness and geometry specifications in the bare wafer market are helping drive demand for its wafer products.
KLAC is also expected to benefit from its exposure to 5G infrastructure and the smartphone market, as well as its new product offerings, especially within its e-beam platform. The company has an overall grade of B and a Buy rating in our POWR Ratings system. KLAC has a Quality Grade of A as it is highly profitable with a net profit margin of 30%.
Plus, the company had $2.5 billion in cash as of the most recent quarter, which dwarfed its short-term debt of $20 million. The company also has a Momentum Grade of B, which makes sense when looking at its returns. The stock is up 38.9% year to date and close to 9% for the month. For the rest of KLAC’s grades (Growth Value, Stability, and Sentiment), click here.
KLAC is ranked #19 in the A-rated Semiconductor & Wireless Chip industry. For more top-ranked stock in this highly rated industry, click here.
Skyworks Solutions, Inc. (SWKS)
SWKS produces semiconductors for wireless handsets and other devices that are used to enable wireless connectivity. Its main products include power amplifiers, filters, switches, and integrated front-end modules that support wireless transmissions.
Its customers are primarily large smartphone manufacturers, but the company also has a growing presence in non-handset applications such as wireless routers, medical devices, and automobiles. The company is benefiting from accelerated 5G deployment and increasing demand for Wi-Fi 6 solutions. Its Sky5 product portfolio is facilitating several 5G smartphone launches.
These offerings are being used by companies such as Samsung, VIVO, and Xiaomi. The company is gaining traction as the demand for mobile internet applications increases due to smartphones, notebooks, and other wireless devices. SWKS is also expanding into new markets. For instance, it is investing to increase its footprint in analog segments such as automotive, medical, aerospace, defense, and industrial.
These markets are very attractive as they have longer product life cycles, fewer competitors, and higher margins. SWKS has an overall grade of B, translating into a Buy rating in our POWR Ratings system. The company has a Quality Grade of B, which makes sense with a net profit margin of 29.8%. The company also has a high return on equity of 28.4% and a low debt-to-equity ratio of 0.3.
In addition, SWKS has a Momentum Grade of B due to solid performance over the past year. The stock is up over 18% for the year and 33.7% over the past twelve months. To access all of SWKS’s grades (Growth, Value, Stability, and Sentiment), click here.
SWKS is ranked #31 in the same A-rated industry (Semiconductor & Wireless Chip) as KLAC.
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This article was written by David Cohne, Chief Value Strategist for StockNews.com. David has helped investors find the most profitable stocks for over 20 years.
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CDNS shares were unchanged in premarket trading Wednesday. Year-to-date, CDNS has gained 20.89%, versus a 19.71% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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