Chip stocks have been struggling over the last few months and they have gotten hit especially hard over the last month. Some of the concern is centered around the trade war with China and the potential impact on growth in the tech sector. One stock in particular that has been hit harder than others in the past month is Monolithic Power Systems (NASDAQ:MPWR). In the last month, the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) is down just over 6%, while MPWR stock is down 19.8% during the same period. Intel (NASDAQ:INTC) is down less than 2% and Micron (NASDAQ:MU) is down 12%.
Monolithic seems to be getting hit harder than it should. The San Jose, California based company does sell a great deal of its products in China and other Asian countries and it operates seven different facilities in China. Because of this reliance on working with China, investors are showing greater concern toward MPWR stock.
This could be another instance where Monolithic Power stock sees selling until there is a new trade deal reached with China and then it will shoot back up. Monolithic has seen great sales and earnings growth in recent years and the growth will likely continue as long as a deal is reached.
Over the last three years, the company’s earnings have grown at a rate of 25% per year, while sales have grown by 19% per year. The company saw earnings grow by 32% in its last quarterly report and the company will report again on Oct. 24.
Monolithic Power’s return on equity is currently at 26.8%. The profit margin is at 29.3% and the operating margin is at 18.5%.
The overall fundamentals behind MPWR stock are strong and I don’t see any reason for that to change, as long as a new trade deal between the U.S. and China is reached. One other key fundamental factor for Monolithic is that it has zero long-term debt. This could help the company if the trade dispute lingers longer than expected.
MPWR Stock Deserves More Attention
Monolithic Power stock doesn’t see nearly as much trading activity as other chip companies. The average daily trading volume is around 400,000 shares which is very low compared to a company like Micron that sees over 36 million shares change hands on the average day.
The low trading volume may be a contributing factor in the analysts’ coverage. There are only nine analysts following MPWR stock and seven of them rate the stock as a “buy,” while the other two rate it as a “hold.” Companies like Intel and Micron have 30 to 40 analysts following them.
The short interest ratio for Monolithic Power stock is currently at 3.2 and the ratio has been all over the place in the last few months. It was as low as 1.39 at the end of June and then jumped as high as 7 at the end of August. The ratio has been affected by changes to both the average daily trading volume and the number of shares sold short.
The number of shares sold short has jumped from less than a million at the end of July to 1.48 million in the mid-September report. The average daily trading volume dipped to only 240,000 in August and that helped the ratio jump to that 7 reading.
Monolithic Power Stock Has Been Trending Higher for Three Years
Monolithic’s stock has been trending higher for the last three years and it has formed an upwardly sloped trend channel in the process. The selling that has hit the stock in the past month has brought the stock down to the lower rail of the channel and now the stock will have to fight to stay in the channel.
It is also worth noting that MPWR stock just dipped below its 52-week moving average for the first time since August 2015. The stock is the most oversold it has been in quite some time. The 10-week RSI is at its lowest reading since October 2014 and the stochastic readings are the lowest they have been since August 2011.
To me, the channel and the oversold levels for Monolithic are suggesting that the stock is getting ready for a bounce. Of course a lot will depend on the trade dispute and the stock will likely move up and down based on the rhetoric between China and the U.S. When anything positive comes out, Monolithic Power stock will likely rise and conversely it will fall if any news suggest the two sides are moving further apart.
I would look to get in to MPWR before an agreement is reached because it is likely to shoot up quickly after a deal. You will have to be patient and you will have to be able to stomach some wild swings, but I think you will be rewarded handsomely in the end.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.