Cadence Design Systems Inc (NASDAQ:CDNS): A Strong Growth Stock with Favorable Technical Setup

Combining fundamental and technical analysis can be an effective strategy for finding stocks with solid growth potential and identifying good entry points. The "Strong Growth Stocks with Good Technical Setup Ratings" screen focuses on companies showing strong earnings and revenue growth, good profitability, and stable financials, qualities that point to long-term upside, while also highlighting positive chart patterns that suggest near-term momentum. This combined approach helps investors find stocks that are both fundamentally strong and technically ready for a move higher.

Cadence Design Systems Inc (NASDAQ:CDNS) stands out as a strong candidate based on this screening method. The company, a top player in electronic design automation (EDA) and semiconductor IP, operates in a fast-growing industry fueled by rising demand for advanced chip design in AI, automotive, and IoT applications. Here, we explore why CDNS meets the criteria of a solid growth stock with a favorable technical setup.

Fundamental Strengths Supporting Growth

The fundamental analysis report for CDNS highlights several important strengths:

• High Profitability (Rating: 9/10)

  • Cadence has an outstanding Return on Invested Capital (ROIC) of 15.31%, better than 92.6% of its software industry peers.
  • Its Operating Margin (30.74%) and Gross Margin (85.57%) are well above industry averages, showing strong pricing power and cost control.
  • The company has consistently reported positive earnings and operating cash flow over the past five years.

• Solid Growth Path (Rating: 7/10)

  • Revenue grew 22.3% YoY, while EPS increased 32.4%, reflecting strong business momentum.
  • Long-term revenue growth averages 14.7% annually, with expected future growth remaining steady at 9.8% for revenue and 10.8% for EPS.

• Stable Financial Position (Rating: 6/10)

  • A Debt-to-FCF ratio of 1.56 suggests manageable debt levels, with good liquidity (Current Ratio: 2.82).
  • While valuation metrics (P/E: 52.5) seem high, this is partly due to strong profitability and sector growth potential.

These fundamentals match the growth investing principles discussed in our introductory article, where a large market opportunity, competitive strength, and steady earnings growth are key for long-term success.

Technical Setup Indicating Upside Potential

The technical analysis report supports CDNS’s appeal with a perfect 10/10 rating, backed by:

• Positive Trends

  • Both short-term and long-term trends are upward, with the stock trading above key moving averages (20-day, 50-day, 100-day, and 200-day SMAs).
  • CDNS has outperformed 80% of all stocks over the past year, with gains spread evenly, signaling steady buying interest.

• Trading Near Highs

  • The stock has been moving between $311 and $376 recently, with a pullback to the middle of this range offering a possible entry point.
  • Support levels at $349 (horizontal) and $336 (trendline) provide downside cushion, while resistance is light above current prices.

• Institutional Support

  • Large investors have shown more buying activity, as seen in the Effective Volume indicator, indicating belief in further gains.

Why This Combination Works

Growth stocks with strong technical setups often benefit from a "positive cycle": improving fundamentals attract big buyers, pushing prices higher, which then draws more attention. CDNS fits this pattern—its leadership in EDA (a key part of semiconductor innovation) provides a lasting growth opportunity, while the technical setup suggests the market is starting to recognize this potential more clearly.

For investors looking for similar opportunities, our Strong Growth Stocks with Good Technical Setup Ratings screen lists other stocks that meet these criteria.

Disclaimer: This article is not investment advice. Always do your own research and consider your risk tolerance before making investment decisions. Past performance does not guarantee future results.