I keep track of every stock I recommend to you here in the Strategic Tech Investor.
The performance … the track record … you see, is very important to me.
For ethical reasons, I can’t invest in these stocks myself, but I’ve got a spread sheet – in the cloud, naturally – and that helps me keep tabs on how well you all are doing.
I’ll catch myself grinning when I see that a stock I’ve recommended is making a move. And I’ll often pump my fist in the air when the stock suddenly soars.
I’m not easy on myself when it comes to losers, either. Folks around Money Map Press will tell you that I fall into quite a funk when one of my picks rolls over and heads south. And that funk can linger for days when one of my favorites turns turtle.
I don’t track my recommendations just to experience these emotional highs and lows. I do it because I want to make sure we’re keeping you all on the road to wealth.
I also do it to add to my knowledge base.
Even after 30 years as an investor, I still have plenty to learn.
As I’ve gathered knowledge over the years, interestingly enough, I’ve become more of a “rules-based” investor.
And with good reason.
While I love an interesting story – or a hot new gadget that’s powered by the latest technology – I recognize that, in a stock-picking venue, these emotional responses to a stock can disrupt my analysis.
So I set up my rules to divert my attention away from such distractions … and focus it on stocks that will create value and make you rich.
A lot of other experts in this business have the same goal.
But that’s where our philosophies diverge.
Those other folks don’t want to share their methods, insights or secrets.
I feel differently. While I want to help you build a fortune, I feel that I also have a duty to educate you: From our work together, I want you to learn how to identify some winners on your own.
That’s why I’ve shared my rules-based systems with you: There’s my “Five Tools to Turn Choppy Markets to Your Advantage,” and, of course, there’s also my foundational five-part strategy for building wealth through tech (here’s Part 1: “The First Rule for Spotting a High-Tech Winner”).
Today, I thought I’d check my STI spread sheet and pick one stock that we can use as a kind of “mini-case study.” I’m going to show you how to apply my rules-based “screens” to analyze the stock. And then you’ll be able to use this system yourself – it’s pretty easy.
Going forward, we’ll be able to use these systems together – keeping you on that road to massive wealth …
One Year Later …
Just about a year ago, in our report “The Tech Firm Even Google Loves,” I told you about NXP Semiconductor NV (NasdaqGS: NXPI), a company that was benefitting in a big way from the Mobile Wave. And because NXP also makes chips for autos, cell phone towers, consumer electronics, industrial technologies and security, it is clearly also nicely diversified.
I pledged to “keep you ahead of the masses” and help you build a “hefty nest egg.” The question now is: How has NXP done since we had that chat?
Pretty well, it turns out. Since June 25, 2013, shares of NXP have gained 109% – more than five times the 18% return of the Standard & Poor’s 500 during that same period.
With that in mind, I want to tell you about the three-part system I use for screening stocks, one that can greatly help you find winners that could double in as little as a year …
I call it my “QFT System.” I’ve used it for many years and now I want to share it with you. So let’s see how it applies to NXP …
Q Is for the Quality of the Story
Over the past 35 years as a stock analyst, I’ve interviewed hundreds of chief executive officers all over the world. I like to talk to CEOs because great companies almost always have great leaders.
I can get a sense of how visionary the CEO is from a meeting or even a phone call. But because I screen so many stocks every week, I simply don’t have time to talk to them all.
So, I do the next best thing. I download the Investor Presentation from a company’s Web site. You can usually find it in the “Investor Relations” section.
The presentation is important for a very simple reason. This is the official story the company is telling institutional investors. And we want to see the institutional players – such as mutual funds and pension funds – buy the stock because their support usually means more profits for us.
But we’re not looking for hype. What we want is a presentation that shows us the company’s unique selling points, where it fits in the industry and what factors are driving growth.
NXP has this nailed.
Right on Page 2 the company lays out four major growth areas it’s targeting: the Connected Car, Cyber Security, Portable & Wearable Devices and the Internet of Things.
In the two pages that follow, we get a sense of the value the company brings to the market. NXP lists its advantages in eight segments – everything from LED lighting and wireless infrastructure to mobile phones and tablets.
We quickly learn that NXP is growing 50% faster than the rest of the industry. Not only that, but the presentation breaks down key trends driving each of several sectors.
And NXP doesn’t stop there. It lists the products in each of these sectors as well as their leadership status. NXP says it ranks 1, 2 or 3 in each of its main sales categories.
In other words, the company has a great story to tell about its leadership in growing tech markets. And it does so in just 15 graphics-driven pages.
F is for Solid Fundamentals
We’ve talked a lot in the past about the importance of finding companies with rock-solid fundamentals. And we can assess just how well run a firm truly is in 10 minutes or less with a free and user-friendly Web tool – Yahoo! Finance.
Let’s look at NXP’s Key Statistics page on Yahoo! Finance. We’ll start with the Forward P/E, listed under the “Valuations Measure.” NXP is selling at less than 12.5 times forward earnings, a 30% discount from the market’s forward P/E of 16.4, a very promising first signal.
Next, we find that the stock has PEG Ratio of just 0.42. That’s another positive sign. The PEG ratio measures the firm’s P/E against its project growth rates. A PEG ratio of 1.0 is considered “fair value.” Less than that is viewed as a discount … a bargain.
And we’ve got a big one here.
Now we want two ratios that give us an indicator of how efficiently the firm is run. Let’s start with Operating Margins, listed under the heading “Profitability.”
A good guideline for an efficiently run firm is an operating margin of at least 10%. At 15%, we see that NXP is well above our minimum threshold.
Our next stop is Return on Equity (ROE), under the heading “Management Effectiveness.” ROE tells us how much the company is making on the money we have invested.
Once again, we’re looking for a minimum 10% return. NXP’s returns are just phenomenal: It has an ROE of 42%.
We just have one more essential number to check. I like to see double-digit Quarterly Earnings Growth. Here we have a slight obstacle because Yahoo! doesn’t have that number.
However, because the other numbers look so great, it’s worth doing a little extra checking. So, I downloaded the company’s recent earnings statement and found that earnings per share (EPS) increased 16% in the first quarter from the year-ago period.
Thus, NXP gets a green light on all of our key financial criteria.
Let’s take a look at the next category.
T Is for Timing
We have a company with a great presentation and stellar financials. What we want to do now is to gauge the timeliness of our investment.
And the best way to do that is to “chart” the stock – an exercise known as “technical analysis.” Again, this is easy to do for free on Yahoo! Finance, and I will walk you through the settings you need.
Let’s pay a visit to the Interactive Chart for NXP. The basic view portrays a stock that has been in a powerful uptrend for a while now. But what we want to know is if the timing is still good.
To do that, we have to customize our chart a bit. Start with the pull-down window under Chart Settings and set the “Line Type” to “Candlestick.”
This is a great way to look at price movements over time, because we can see whether the bulls or bears are “in charge” of the stock on a daily basis. A red candlestick shows a losing day, and a green one is for days the stock posted gains.
Now, under Chart Settings pull down “Chart Scale” and select Log – that’s short for “logarithmic” – which will automatically smooth daily fluctuations.
We see that the chart for NXP is pretty solid. But to improve our timing, we want to see how much “support” there is for this stock right now. And the best way to do that is to plot two key trend lines.
The two most widely used are technical indicators known as the 50-day and 200-day moving averages. We can add those easily by pulling down the Technical Indicators tab and select Simple Moving Average (SMA). For Line 1 enter 50, and for Line 2 enter 200.
Once we do this, we have before us a picture of a very powerful stock …
We see that, over the past year, NXP has never even come close to the 200-day line. Moreover, every time the stock has creased the 50-day line it has rallied from there, meaning we have strong bullish support for NXPI.
These moving averages can be a bit confusing if you’ve never studied them before. Essentially, moving averages confirm trends and show whether a stock has momentum or not. A stock has momentum, or is in an uptrend, when it trades above its moving averages.
The 50-day moving average shows you how the stock is doing in the medium term, while the 200-day moving average shows you how the stock is doing long term. So, while NXP can be a little volatile week to week – or even month to month at times – its long-term prospects are extremely solid.
Thus, what we have with NXPI is a company that passes all three of the tests in my QFT system with flying colors.
Clearly, not all the stocks you are interested in buying will look this good. But by using this system on a regular basis, you will learn to “read” stocks -separate the strong from the weak, and greatly increase the odds of picking winners.
And you’ll be surprised at how quickly you can improve your earnings.
And that’s what we are trying to do here at Strategic Tech Investor. We’re working together to focus on the rules and methods that will help you greatly bolster your net worth.
Editor’s Note: Your feedback is very important. As always, I welcome your comments, questions and suggestions. Post a comment below … I look forward to hearing from you.
- Strategic Tech Investor: Five Tools to Turn Choppy Markets to Your Advantage
- Strategic Tech Investor: The First Rule for Spotting a High-Tech Winner
- Strategic Tech Investor: The Tech Firm Even Google Loves