Technology stocks resumed their bullish momentum in the Spring as the Technology Select Sector SPDR Fund (XLK) has gained 19.6% since May 12th. While investors can’t predict how long this current run will last for tech stocks, a great way to limit your losses is to focus on highly profitable tech stocks. Picking high-profit stocks can lead to substantial gains.
Studies have found that investing in profitable stocks can generate above-average returns. Profit margins can tell us how well a management team is running a business. It represents the percentage of sales that has turned into profits. While there are a few ways to look at net profits, I prefer net margin since it shows a company’s bottom line after other expenses have been taken out of revenue.
As we’ve seen over the last couple of quarters, companies are generating billions in sales. But if the sales aren’t turning into profits, then a company may not be worth buying. So, I ran a screen for technology stocks rated a Buy in our proprietary POWR Ratings systems with a net profit margin of 20% or higher. The results included top stocks such as Cadence Design Systems, Inc. (CDNS – Get Rating), KLA Corporation (KLAC – Get Rating), and Skyworks Solutions, Inc. (SWKS – Get Rating).
CDNS was founded in 1988 after the merger of ECAD and SDA Systems. The company is an electronic design automation, or EDA, firm specializing in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems.
The company benefits from strength across segments, including digital & signoff solutions and its functional verification suite. CDNS is also gaining from investments in emerging trends such as the Internet of Things (IoT), autonomous vehicle subsystems, and strength in the semiconductor end-market.
The firm’s frequent product launches are expected to help it generate revenues growth over the long term. It focuses on providing end-to-end solutions, which reduces the time required to introduce a semiconductor product to the market. The company raised its 2021 revenue guidance based on its strong performance in the second quarter.
Secular tailwinds in chip design, including 5G, IoT, and AI, should increase demand for EDA tools and help support growth for the company. CDNS has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The company has a Quality Grade of A due to solid fundamentals. For instance, its net profit margin of 23.5% is much higher than the industry average of 5%.
CDNS also has a low debt-to-equity ratio of 0.1. The firm has a Sentiment Grade of B as it is well-liked by analysts. Five out of seven analysts rate the stock a Buy. We also provide Growth, Value, Momentum, and Stability grades for CDNS, which you can find here.
CDNS is ranked #20 in the Software – Application industry. For more top stocks in this industry, click here.
KLAC designs and manufactures yield-management and process-monitoring diagnostic and control systems (PDC) for the semiconductor industry. The systems are used to analyze the manufacturing process at various steps in a product’s development. The firm’s laser-scanning products are used for wafer qualification, process monitoring, and equipment monitoring.
The company also provides inspection tools and systems for optical metrology and e-beam metrology. KLAC is the leader in a…
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