The semiconductor shortage drags on.

And demand remains intense.

So when a circuit maker pops up on my GVI radar, you know it’s worth a look.

And that’s what I have for you this week.

My Stock of the Week is a leading global manufacturer of sensor integrated circuits.

These circuits can be found in cars and data storage centers, and they’re used in green energy solutions.

As you’d expect, business is booming.

Total net sales in the company’s second quarter came in at a record $237 million, up 23% year over year.

And after hitting a bottom in October, the stock has headed straight up. I expect a 40% return in 2023, which is likely to be a tough year.

Get all the details on the stock – including the ticker – in my latest video.

Click on the image below to watch it.

Note: Which stocks are you interested in for 2023? Send them to mailbag@manwardpress.com and I’ll review them in future videos.

Transcript

Hi, everyone. Welcome to my home office, and welcome to another Stock of the Week.

We’ve had a busy, busy week. First of all, I traveled to Asia. I was in India. And on top of that, we’re coming up to the year’s end, so my team’s working extra hard, presenting me with new ideas, good ideas to present to all of you good folk who are following me as part of the Manward family.

So let’s have a look at this week’s Stock of the Week. We’ve come up with Allegro MicroSystems (ALGM) for you.

Now, it’s a leading global designer, developer, manufacturer and marketer of sensor integrated circuits.

Integrated circuits… silicon chips. You all know that there’s a global shortage and a massive demand.

You might have seen some of the data that shows the average car today has more silicon chips in it than the number that were in the rockets which went to the moon in the 1960s and ’70s.

And so you get an idea of that, just the huge demand for circuits. Now, this is a specific type of integrated circuits the company works in.

It’s listed on the Nasdaq and headquartered in New Hampshire. It has centers across America, Europe and Asia, including Japan. So it is geographically diversified.

The product portfolio provides efficient and reliable solutions for the electrification of vehicles, automotive ADAS safety features, automation for Industry 4.0, power-saving technologies for data centers and green energy applications. Green energy is booming.

For its second quarter results, total net sales were a record $237 million, increasing 23% year on year. I like those numbers.

It’s got a market cap of $5 billion, so I’m not talking about a small company. It has generated about $768 million each year in sales as well. Profits come in at about $119 million.

So let’s just look at some of those numbers in a bit more detail.

Well, on my Growth-Value-Income rating, which, as you well know, is my proprietary algorithm… It looks at the valuation of a company based on its share price relative to its profitability. It looks at the revenue growth of a company, and it looks at the income that company’s generating. And any score of 7 or higher meets my minimum requirements. That means it’s a pretty good company. And that algorithm was created using proprietary weightings of valuation, growth, income, momentum and other factors.

So this one’s got a 7. Good.

Cash return on capital invested – or CROCI – is 12%. What is that?

Well, CROCI is a formula invented by Deutsche Bank. It’s used by Goldman Sachs Wealth Management for its wealthiest clients in picking stocks. What they discovered is companies in the top quartile by CROCI – in other words, the top 25% of all companies by cash return on capital invested – generated, as a basket of companies, a return of 30% per annum on average over the long term. Not every year, not every company in that portfolio, but as a basket.

This company meets that requirement.

It’s generating a good amount of cash on the capital that the business employs. In other words, it’s efficient. If you think about capital as being the raw material of a company and cash as being a prerequisite to making profits and the share price rising, you can see why it’s an important formula.

The stock has been performing well so far this year.

And overall, I like the numbers that are coming back on this. Let’s look at some of those numbers in a bit more detail.

And when we do, what do we find?

Well, not just cash return on capital invested but also return on capital employed, return on equity. Other measures, basically, of how efficient is this company of taking the money it’s got from shareholders – or it’s investing from the profits it’s been earning – and converting that into more profits. And it’s doing well in that regard.

Forecast growth… Turnover is forecast to grow 24%. Profits are forecast to grow 85%, pretax profits nearly 6%, as you can see the numbers there.

There are some… obviously you don’t tick every box. Turnover’s not just been going up in a straight line, though 2022 definitely looks very good. Bumper profits as well.

This is all, I think, part of the global supply chain issues surrounding anything to do with integrated circuits, silicon chips and the like. Okay. So good overall numbers there.

Let’s just take a look at the price chart. What do we find here?

Well, it’s going in the right direction so far this year. It sort of bottomed out around the $20 mark. It’s now at the $30 mark. And I would expect this to continue progressing upward and give us… I’d say, over 2023, I’d be happy with a 40% return from this stock over that period of time. I don’t expect it will go below the lows of $19 or $18 where the base was back in October, which it has since bounced off.

So I think we’ve got a good reward-risk trade-off in this.

Thank you very much.