Semiconductor demand has been soaring since the pandemic began… and semiconductor stocks have been too.

This week, we’re taking a close look at one with growing revenue and lots of cash.

It’s an efficient company… and it’s forecast to grow profits an impressive 148%.

But there are a couple of red flags…

Can the company maintain its soaring stock price… or will volatility drag it down?

Is it priced right based on its valuation… or are expectations too high?

Get all the details on the stock in my latest video.

Click on the image below to watch it.

Transcript

Hello, Manward family, and welcome to another Stock of the Week.

At the moment, going into 2023, you know there’s a global shortage of silicon chips. And that has led to a lot of semiconductor companies being overpriced and overvalued.

Well, let’s have a look at one and learn something from it… and see why it is a Stock of the Week.

Lattice Semiconductor (LSCC) is headquartered in the “Silicon Forest” of Hillsborough, Oregon. It’s a company that is valued at $9.1 billion.

Semiconductors are in huge demand, partly because as we came out of COVID, there was a spring back in demand – a backlog, pent-up demand – but also supply chain problems.

Lattice’s revenues continue to increase, and growth is increasing. But as you all know, I look at growth, value and income.

So let’s look at those factors for the company and see how it’s doing.

On my Value-Growth-Income scale, it’s got a score of 7. That’s my proprietary algorithm, which measures the valuation of a company, weighs that; looks at the growth of a company, weighs that for its relative importance to valuation depending on historical research; measures and weighs income momentum, all those factors. And it comes to an overall score out of 10.

This has got a 7 out of 10, which means it beats the minimum requirements that I need to see.

It’s got a cash return on capital invested (CROCI) of 23%.

Now, as a reminder, for those who are not familiar, this is a formula invented by Deutsche Bank and used by Goldman Sachs Wealth Management to pick stocks for its wealthiest clients. Cash return on capital invested looks at the cash that a company’s generating based on the amount of capital – the raw materials that every company needs – that it has invested.

So how efficient is that machine at converting capital into cash and therefore into profits?

And the reason it’s such an important formula is that companies in the top quarter, or the top 25% of all companies by CROCI, generate as a portfolio of stocks 30% returns per annum. Not every stock in the portfolio and not every portfolio every year. Some portfolios of those stocks will do better and some worse in any given year.

But this company would meet that criterion. It would qualify for the team, let’s put it that way.

The price has been skyrocketing. That’s some degree of momentum. It’s not necessarily a lack of undervaluation. A Sortino ratio of 0.76. That’s a measure of reward… the returns on average versus the risk, or volatility, of missing them. Now, anything above 0.3, I’m happy with. Ideally you want it to be above 1.0, but very few companies actually meet that.

Now, there are some negatives with this Stock of the Week. One is volatility. Be warned. I’m afraid volatility at 32% is not ideal at all. But we’re looking at it to teach us a lot of things.

Like I said, CROCI is 23%. Return on capital employed is 16%, and return on equity is 24%. It’s an efficient company.

Turnover is going in the right direction. Total borrowing is going in the right direction – in other words, it’s reducing it. Operating cash flow is going up as well. Total assets are holding up strong. Pretax profits are holding up. Turnover is forecast to grow 28%. Profits are forecast to grow 148%. Pretax profits are up 151%.

So what’s the major danger here?

It’s, I’m afraid, valuation. It doesn’t tick every single box. Its forecast P/E ratio is at a multiple of 38. In other words, its current share price relative to its forecast profits is 38.

That, together with volatility, means, yeah, it’s overvalued and volatile. So it’s not an easy one.

And you can see how much it’s jumped up – from, what, $15 to $67 – in just a couple of years. And it’s gone sideways. Now, could it fall back? Could it halve in price? Yes, it could, so be warned.

However, there is this pent-up demand, and I think it’s worthy of a Stock of the Week because despite the fact that it could halve its value – yes, that’s the risk, because of the volatility and the overvaluation – the demand for semiconductors just remains ridiculously strong. And that’s why I wanted to show it to you.

And like all of these Stocks of the Week I provide for my Manward family, it’s there partly to educate, to inform, to show how so many things can be going right for a company but not necessarily everything else. And when a company’s like this, the biggest danger is when there’s so much already priced into it, and we know that is the case here from the valuation multiple. If it misses those numbers by a tiny amount, its share price is likely to fall.

But if it continues to exceed those numbers, then of course it’ll continue on the kind of trends it’s been on before.

So hopefully this was something insightful, something to educate and inform you as well.

Thank you very much.