For investors aiming to benefit from upward price movement in companies with sound business foundations, a method using both technical and fundamental analysis can be very effective. The "Strong Growth Stocks with good Technical Setup Ratings" screen works to find precisely this: companies showing solid underlying business growth and profit that are also nearing a possible technical breakout. This two-part method works to locate stocks where good business fundamentals supply the support, and an encouraging price chart indicates a move may be coming. One stock that appears from this method now is ANALOG DEVICES INC (NASDAQ:ADI).
Fundamental Strength: The Support for Growth
A lasting breakout needs a strong fundamental basis. ANALOG DEVICES INC displays a convincing growth profile, which is the main requirement for this method. According to ChartMill's fundamental analysis report, ADI receives a high Growth Rating of 8 out of 10. This rating is backed by notable recent and expected performance:
- Past Growth: Revenue increased by 25.91% over the last year, while Earnings Per Share (EPS) rose by 37.26%. The company also displays a good history, with average yearly revenue growth of 14.49% over recent years.
- Future Expectations: Analysts predict continued good performance, with EPS expected to increase by 22.39% each year going forward. This rise in earnings growth from the past rate is a good indicator for momentum investors.
Beyond growth, the method needs "decent profitability and health" to confirm the company is financially stable and effectively turning sales into profit. ADI's fundamentals match here too:
- Profitability Rating (7/10): The company has industry-leading margins, with a Gross Margin of 62.84% and an Operating Margin of 29.70%, doing better than most of its semiconductor industry peers. Its Return on Invested Capital (ROIC) also compares well within the industry.
- Financial Health Rating (5/10): While this is the more average score, the report points out a strong Altman-Z score (7.45) and a good Debt-to-Equity ratio (0.23), showing a low near-term bankruptcy risk and a firm balance sheet. The main areas of attention relate to liquidity ratios that are below some industry averages.
This mix, explosive recent growth, good future expectations, high profitability, and acceptable financial health, forms the fundamental "foundation" that growth investors want. It indicates the company has the business momentum to possibly support a continued rise in its stock price.
Technical Setup: The Price Chart for a Breakout
A strong fundamental basis alone does not assure immediate price gains. This is where technical analysis contributes an important timing component. The method specifically searches for "technical breakout patterns," and ADI's chart shows an encouraging setup. ChartMill's technical analysis report gives ADI a good overall Technical Rating of 8 and a Setup Rating of 7.
Important technical points include:
- Long-Term Trend: The long-term trend is still positive, with the stock price above its important 200-day and 100-day moving averages, which are all moving upward.
- Consolidation Phase: Lately, the stock has been moving within a range between about $300 and $328 after a large increase over the past year. This kind of pause can work to gather energy for the next price move.
- Critical Resistance: The nearby technical barrier is the resistance area between $355 and $361. A clear move above this level, especially with higher trading volume, would confirm a bullish breakout from the recent consolidation, possibly leading to more gains.
- Defined Support: On the lower side, a clear support area exists between $303 and $315, created by a combination of moving averages and trendlines. This gives a reasonable area for a stop-loss order, aiding in risk control if the breakout try does not succeed.
The existence of a clear resistance level to move above, along with a strong underlying trend and a time of consolidation, forms the "technical breakout pattern" the screen looks for. It finds a moment where the stock's price action is tightening, possibly before a notable move.
Combination: A Candidate for Momentum
The "Strong Growth Stocks with good Technical Setup Ratings" method works because it looks for agreement: a company with improving business measures (growth, profitability) at a time when its stock price is leaving a period of pause and testing a key level. ANALOG DEVICES INC currently matches this idea. Its fundamental reports verify a strong growth engine is operating, while its technical chart indicates the stock is at a beginning point, waiting for a sign to move forward.
It is necessary to remember that the wider market condition, shown by a negative short and long-term trend for the S&P 500, adds macro risk. Even good individual setups can be tested by general market declines. Also, ADI's valuation, while better compared to its industry, is still high on an absolute P/E basis, making it reactive to any shortfall in its high growth expectations.
Find More Potential Breakout Candidates
The mix of strong growth fundamentals and encouraging technical patterns is an interesting search filter for momentum investors. If this method fits your investment style, you can use the same screen to review other possible opportunities. View more results from the "Strong Growth Stocks with good Technical Setup Ratings" screen here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The analysis presented is based on data and reports from ChartMill.com and reflects the situation at the time of writing. Investing in stocks involves risk, including the potential loss of principal. Past performance is not indicative of future results. Always conduct your own due diligence and consider consulting with a qualified financial advisor before making any investment decisions.