Yes, in case you haven’t checked lately, Tech is still hotter than the Philadelphia Eagles, but some areas are hotter than others. Within the S&P 500 Information Technology sector, Semiconductor & Equipment stocks have returned nearly 7% on the year (about average for the sector), but last week they led their counterparts by a nearly 2:1 margin in percentage return.
Within the semiconductor group, Cypress Semiconductor (CY) has been on a tear, putting up a 14%-plus YTD return through Friday on the back of a 33% rally in 2017. The stock has gained around 180% since bottoming at $6.30 in February 2016.
Anything in particular going on? Cypress has been around since the 1980s, but in recent years the company has pivoted toward a little something you may have been hearing about lately: the Internet of Things (IoT), which is shorthand for the technology of controlling physical devices via Internet/wireless communications—everything from our friends Siri and Alexa to our cars, thermostats, refrigerators, and virtually any other consumer appliance or device you can think of (and that’s not even taking into account industrial applications). The “smart home” of the future you keep hearing about is all about the IoT.
And that’s where Cypress is planting its flag. The company has made a couple of notable moves in the past few years, first by merging with automotive electronics leader Spansion in 2015, and then purchasing Broadcom’s (AVGO) IoT portfolio in 2016.1 The company has thus also carved out a sub-niche by specializing in automotive tech, both for traditional and driverless cars.
In its most recent (Q3) earnings release on October 26, the company said it had an 80% revenue increase for IoT components.2 The stock has repeatedly popped up on lists of attractive acquisition targets in the semiconductor space over the past year or so,3 and Cypress execs have themselves expressed the opinion that the wave of mergers in the space over the past five years is far from being over.4
The weekly chart above shows Cypress has been exhibiting some “classic” technical behavior since its 2016 low. The trading range that dominated the first half of 2017 found its low around the 2016 swing high, while the top of the range functioned as support during the stock’s sharp pullback in November.
On Friday, CY traded just above its November high of $17.43—a 40-day new high (which also equaled the 40-day high close) that also happened to be its highest level in six years. It followed that up with a 1%-plus rally yesterday. Given the amount of ground the stock has covered in the past few weeks—and the fact that it has just approached a significant recent high that could at least represent resistance in the near-term—the stock could be expected to cool a bit.
Looking at 323 past 40-day new highs/closes in CY since 1987 provides some evidence that the stock tends to do just that: The stock was, on average, flat to lower over the next five days; when the initial new high was followed by a second new high/close—as was the case yesterday—weakness still had a slight upper hand over the next few days.
The stock could, of course, keep running in the near-term, but if it continues to test past technical levels on its way to higher highs, the recent 40-day breakout level around $17.43, as well as the January 9 high and January 10 low, are reasonable support levels. After all, until the stock makes a lower low, the current short-term uptrend is still intact.
1 TheStreet.com. 12 Top Tech Stocks for 2018: Intel, Roku and 10 More That Will Surprise You. 1/20/2018.
2 Barron’s. Cypress Semi CEO: A ‘Great Quarter’ of IoT, Auto Chips. 10/26/17.
3 Investors Business Daily. Wall Street Analysts Identify Top Chip Takeover Targets For 2018. 12/26/2017.
4 TheStreet. Cypress Semi, Media Industry Execs: Expect a Lot More M&A in 2018. 1/16/18.