Companies like Intel (NASDAQ:INTC), Advanced Micro Devices (NASDAQ:AMD) and Applied Materials (NASDAQ:AMAT) tend to get the bulk of media coverage when they have news or report earnings, but Analog Devices (NASDAQ:ADI) is quietly holding its own and ADI stock is outperforming the others by some significant measures.
For example, Analog Devices doesn’t have near the market cap of Intel ($36 billion vs. $216 billion), but its earnings growth and sales growth have been much better over the last three years. It can’t match Applied Materials’ earnings growth over the last three years, but its profit margin and operating margin are better. Overall, Analog Devices stock seems to be flying below the radar when compared to other chip companies.
ADI Stock: Overall Fundamentals Are Strong
Analog Devices has seen its earnings grow by 29% per year over the last three years and its earnings-per-share grew by 21% in the most recent quarter. The company just announced earnings on Wednesday and it beat analysts’ estimates on both EPS and revenue. The company also announced late Tuesday that it is reinstating its stock buyback program.
As far as sales growth goes, ADI stock has averaged growth of 26%-per-year over the last three years, which is better than any of the other companies mentioned above. Sales were up 10% in the most recent quarterly report.
Looking at the company’s profitability measurements, the operating margin is 31.27%, the profit margin is 35.7% and the return on equity is at 21.6%. The operating and profit margins are also the highest of the four companies mentioned.
The Chart Shows a Trend Channel Guiding the Stock Higher
Looking at a weekly chart, we see that Analog Devices stock has been moving higher over the last two and a half years with a trend channel forming that seems to be guiding the stock higher.
The lower rail of the channel is right on top of the stock’s 52-week moving average and that should give ADI stock two layers of support on any pullback.
Something else to take note of on the chart is that Analog Devices stock has been pretty consistent this year. Many of the other chip companies have seen 12-15% declines since mid-June.
It also worth mentioning that the weekly stochastic readings are the lowest they have been since the February low. The stochastics never made it to oversold territory in February. In fact, they were in the same area they are in now when ADI stock reversed and moved higher.
From the low in February to the high in June, ADI gained almost 30%.
Analog Devices Stock Gets Less Attention Too
Investor sentiment toward Analog Devices is rather interesting compared to its competition. Most of the other chip companies have at least 30 analysts following them, while Analog Devices only has 26 following it.
Of the 26 following ADI stock, 16 rate it as a “buy” and the other 10 rate it as a “hold”, which means 61% of analysts have it rated as a buy. Although that may seem decent, 95% of the analysts following Applied Materials rate it as a “buy”. Of the 31 analysts following Micron Technology (NASDAQ:MU) — another popular semiconductor company — 90% of them rate it as a “buy”. So not only does ADI not get as much coverage, but the optimism from analysts isn’t nearly as high.
The short interest ratio on Analog Devices stock also stands out from the crowd. The short interest ratio is simply the number of shares sold short divided by the average daily trading volume. Analog Devices’ short interest ratio is currently at 3.31. That is the second-highest short interest ratio of the seven chip companies I compared Analog Devices stock too.
I normally view a short interest ratio of 5.0 or higher as extreme pessimism. Analog’s isn’t terribly high, but compared to its competition there is more pessimism toward ADI stock. It’s the stock that has outperformed the most in the industry, both fundamentally and in terms of its price performance in recent months, but there is more pessimism toward it.
That isn’t a bad thing.
Bottom Line on ADI
The bottom line is that Analog Devices is performing very well in terms of the company’s fundamental performance and the stock’s price performance. Despite these facts, Analog Devices stock seems to be less respected than its competitors and that could be a good thing for you.
The higher pessimism can serve to boost the ADI stock price as bears become bulls. Having fewer analysts following the company and less of them rating the stock as a buy leaves room for additional coverage and more room for upgrades than we see with other stocks.
I look for Analog Devices to continue outperforming its peers and suggest you add the stock to your holdings. I would look to hold it as long as the stock remains above the lower rail of the channel and above the 52-week moving average.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.