Investors aiming to benefit from large price gains frequently use a two-part method, merging the prospective view of fundamental analysis with the timing cues of technical analysis. One specific tactic involves searching for solid growth stocks that are also showing encouraging technical breakout formations. The logic is simple: find firms with sound and speeding business basics, like earnings and revenue growth, that are also near a possible technical breakout, indicating market momentum is matching the inherent strength. This combination can mark a situation where a company's growth narrative is starting to be acknowledged and reflected in the price by the wider market.
MACOM Technology Solutions Holdings (NASDAQ:MTSI) recently appeared from a search made to locate precisely this kind of situation. The semiconductor firm, which focuses on radio frequency, microwave, and optical parts, seems to be displaying the traits that growth-focused technical traders seek.
Solid Fundamental Growth Driver
Central to this tactic is the need for outstanding business growth, as previous and expected expansion are main forces behind long-term stock results. Based on ChartMill's fundamental analysis report, MTSI receives a high Growth Rating of 8 out of 10, doing much better than many others in the contested semiconductors field.
The company's growth numbers are notable:
- Strong Recent Growth: Revenue jumped 32.58% in the last year, while Earnings Per Share (EPS) increased a notable 36.04%.
- Firm Historical Path: The average yearly EPS growth across recent years is a good 29.11%.
- Speeding Forecast: Possibly most key, the growth narrative is anticipated to persist. Analysts forecast average yearly EPS growth of 30.89% and revenue growth of 16.26% in the next years. The report states that the revenue growth pace is speeding up relative to the past.
This steady and speeding growth pattern is vital for the tactic, as it supplies the fundamental basis that can support a long rise in the stock price.
Supporting Fundamentals: Condition and Earnings
While growth is most important, the tactic also sorts for acceptable financial condition and earnings to steer clear of firms growing in an unstable way. MTSI's report presents a varied but sufficient view here.
- Financial Condition (Rating: 7/10): The company shows a very good balance sheet. Main positives contain:
- A sound Altman-Z score of 14.19, showing low bankruptcy danger.
- Very good liquidity with a Current Ratio of 3.71 and a Quick Ratio of 2.98.
- A workable Debt/Equity ratio of 0.31.
- Earnings (Rating: 5/10): This aspect is middling. While the company has a good Gross Margin of 54.69% and a better Operating Margin of 13.40%, its Return on Assets and Return on Equity were negative in the most recent year. Still, the positive and increasing Return on Invested Capital (6.12%) indicates the core activities are creating value.
For a growth stock, this financial outline is often satisfactory. The high condition rating suggests MTSI has the steadiness to fund its growth, while the earnings numbers show it is moving toward more effective profit creation, a common stage for firms in a high-growth investment phase.
Technical Breakout Formation Active
Spotting solid fundamentals is only part of the task; the technical analysis part tries to time the entry. ChartMill's technical analysis report gives MTSI a top rating of 10/10, with a Setup Rating of 7/10, signaling a positive formation.
The technical view is clearly optimistic:
- Forceful Trend Agreement: Both the near-term and long-term trends are rated positive. The stock is trading well above its important moving averages (20, 50, 100, and 200-day SMAs), which are all in a rising arrangement.
- Good Relative Results: MTSI has done better than 94% of all stocks in the past year and 77% of its semiconductor industry counterparts. It is presently trading close to its 52-week high.
- Stabilization and Breakout Arrangement: The report notes that prices have been stabilizing in a broad band over the last month and are now trading near the top of that band. With almost no resistance above the present price and a set support area below, the arrangement indicates the stock might be set for a resumption of its upward trend. The report points out a possible trade arrangement with an entry point just above a recent high.
This technical position is exactly what the search tactic tries to catch: a fundamentally sound stock that is not just going up, but doing so with force and breaking out of stabilization, possibly signaling the next upward move.
Valuation Note
It is key to remember that high growth often carries a high price. MTSI's valuation rating is a low 2/10, with a P/E ratio above 65. This is costly compared to the larger S&P 500 but is more similar to its high-growth industry peers. For growth investors, a high valuation can be acceptable if the company keeps meeting its aggressive growth forecasts, making the PEG ratio (which includes growth) a more applicable number to monitor in the future.
Locating Comparable Situations
MTSI offers an example in matching forceful fundamental growth with an optimistic technical setup. For investors curious about using this joined fundamental and technical tactic to find other possible situations, additional results can be reviewed using the Strong Growth Stock Technical Setups search.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or a proposal to buy or sell any securities. The examination is founded on data and reports supplied by ChartMill, and investors should do their own complete research and think about their personal financial position and risk comfort before making any investment choices. Past results do not guarantee future outcomes.
