Since I took a first look at Rubicon Technology (RBCN) in May 2011, the stock has plunged from the mid-$20 level to roughly $6.70. Meanwhile, competitor GT Advanced Technologies (GTAT) has soared almost 180% in the past year, while Cree (CREE) has risen and fallen along the way only trade recently in the $44 area, or about the same price it was on May 31, 2011. Why has Rubicon faired so poorly? More importantly: Has it bottomed and is it a good buy now?
The $165 million electronic materials provider specializes in sapphire crystal growth technology and large-diameter sapphire wafers, which is why the stock is back on my radar.
Sapphire is the second-hardest material in nature after diamond, and has exceptional optical qualities, physical strength, resistance to abrasion and corrosion, and durability under extreme pressure and temperature. Thus, it is an ideal base material for semiconductor components used in optical and electronic devices. It has become the predominant base material for the production of LEDs.
The company seems to be heavily dependent on three countries: China, Taiwan and Australia. Worries about the slowing Chinese economy could also be contributing to the weakness.
However, in early 2014, it was reported that Apple’s (AAPL) iPhone may switch to sapphire cover glass instead of Corning’s (GLW) Gorilla Glass, which is currently used on iPhones and many other top smartphones. While Gorilla Glass is known for being durable and thin, sapphire cover glass is even thinner, stronger and more scratch-resistant. However, it is also more expensive.
GT Advanced Technologies sells and operates advanced sapphire furnaces that produce sapphire materials. Last year, Apple and GTAT signed a contract for the company to operate these furnaces in one of Apple’s facilities. This caused GT’s stock to surge 400% last year.
It is my belief that all smartphones and handheld devices (as well as smart watches) will soon shift to sapphire. Reportedly, Samsung has asked sapphire wafer-makers like Rubicon to submit product samples. If Rubicon can get a contract from Samsung, then the stock could also surge. Also, it could get contracts from smaller Chinese smartphone manufacturers.
Looking at the fundamentals, it seems that revenue has bottomed and is starting to rise. This is a good sign, but I’m watching the company’s expenses, as they are growing faster than revenue.
The stock seems slightly undervalued, with positives (green) outnumbering negatives (red) 11 to 10. On the positive side, price/book, price/sales and price/assets are low. Revenue and sales growth are also high. Current ratio is very high, meaning the chances of dilution are low, and short sellers are starting to cover.
On the negative side, all margins are negative, but institutional ownership is still very high.
At roughly $6.40, the stock is above its low target of $5.25 made by the 9 analysts recorded by Thomson/First Call. The mean target is $10.14, the median target is $8.50 and the high target is $17.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock is 2.5, unchanged from a week ago.
The long-term graph shows that the price has bounced off of its first support level and could head to its first resistance level around $7.50. If cleared, there could be a breakout to the second resistance levels around $13.50. If shares fall below first and second support around $5.00, a test to the third support level around $4 could come. In other words, there is a lot of upside if the company can turn the corner.
The short-term graph below looks more bullish than bearish. On the bullish side, the price has bounced off of support and could rise to the first resistance level near $7.00. Further, the MFI, RSI, Stochastic %K and W%R are all near oversold territory, meaning that the stock may rise. The two times when the MFI, RSI, Stochastic %K or W%R were at similar levels, as indicated by the orange lines, the price rose. Further, the MACD has formed a bullish upward cross.
On the bearish side, the price trend is still down and two resistance lines share the $6.84 level. This level could become a battle between the bulls and bears.
Sapphire is in high demand, especially with the new iPhones and other devices coming to market, and I’m looking at Rubicon as a “safer” and “cheaper” way to play this demand.
I normally shy away from earnings trades as they can be risky and a lot has to go right for you to make a serious profit. However, if Rubicon shares have bottomed and start to show an uptrend into the company’s next earnings date, then it may present a solid earnings trade.
In the meantime, I like the Rubicon (RBCN) December 8 calls (RBCN141220C00008000) at current levels around 40 cents, as my original entry was 35 cents.
My exit target for these calls is 70 cents. There is no stop loss level at this time, as I typically don’t use stops on options below 50 cents.