Monster chart breakouts and stunning fundamentals – why settle for anything less
Recommended 7 stocks
Palo Alto Networks PANW Buy @ $189.50
Nvidia. NVDA Buy @ $236
Ashtead Group. AHT Buy @ 5528p
United Rentals. URI. Buy @ $458.50
Global X US Infrastructure Development PAVE. Buy @ $29.18
Cadence Design Systems. CDNS. Buy @ $193
Synopsys. SNPS. Buy @ $364
I have realised that there is something else going on in this bear market. It is not just Coppock heading into negative territory and in some cases turning higher to give buy signals. The other thing that is happening, visible on these very long term charts where each candlestick represents a year of trading, is that some big consolidations are forming that look like springboards to great share price gains ahead.
A classic example is Palo Alto Networks, the fast-growing cyber security specialist, whose shares are charted above. The shares have been listed for 12 years and in that period there have been three periods of major consolidation and two periods of sharply rising prices. The current position is that the shares are building a promising consolidation.
This is supported by strong fundamentals. PANW continues to grow and is positive on prospects. What is not so good is the performance of ETFs where Palo Alto is one of the largest holdings. An example is charted below. The sector is deeply out of favour although the Coppock is at least negative putting the ETF shares in the buying zone.
Nvidia plays dominant role in AI
What I like about these 12 month candlestick charts is that they help you see the wood for the trees. I think Nvidia is building a major consolidation from which it will eventually break higher. Coppock is in the buying zone and is just on the cusp of turning higher from negative to give a buy signal.
Nvidia is one of the world’s most exciting semiconductor companies. Earnings per share are projected to rise from $1.74 for 2022 (ending 31 January 2023) to $5.56 for 2025 (ending 31 January 2026).
The company is really majoring on AI. So why is this such a big deal.
In its most fundamental form, AI is the capability of a computer program or a machine to think and learn and take actions without being explicitly encoded with commands. AI can be thought of as the development of computer systems that can perform tasks autonomously, ingesting and analyzing enormous volumes of data, then recognizing patterns in that data. The large and growing AI field of study is always oriented around developing systems that perform tasks that would otherwise require human intelligence to complete—only at speeds beyond any individual’s or group’s capabilities. For this reason, AI is broadly seen as both disruptive and highly transformational.
A key benefit of AI systems is the ability to actually learn from experiences or learn patterns from data, adjusting on its own when new inputs and data are fed into these systems. This self-learning allows AI systems to accomplish a stunning variety of tasks, including image recognition; natural language speech recognition; language translation; crop yield predictions; medical diagnostics; navigation; loan risk analysis; error-prone boring human tasks; and hundreds of other use cases.
The ideal hardware for the heavy work of AI systems are graphical processing units, or GPUs. These specialized, superfast processors make parallel processing very fast and powerful. And massive amounts of data—essentially the fuel for AI engines— comes from a wide variety of sources, such as the Internet of Things (IoT); social media; historical databases; operational data sources; various public and governmental sources; the global science and academic communities; even genomic sources. Combining GPUs with enormous data stores and almost infinite storage capabilities, AI is positioned to make an enormous impact on the business world.
Among the many and growing technologies propelling AI to broad usage are application programming interfaces, or APIs. These are essentially highly portable bundles of code that allow developers and data scientists to integrate AI functionality to current products and services, expanding the value of existing investments. For example, APIs can add Q&A capabilities that describe data or call out interesting insights and patterns.
It isn’t an overstatement to say that artificial intelligence, or AI, offers the capability to transform the productivity potential of the entire global economy. A study by PwC found that AI’s contribution to the global economy will total nearly $17 trillion within ten years. To participate in this AI-inspired economy, organizations need to overcome AI challenges.
The processing power needed to build AI systems and leverage techniques like machine learning and image processing or language understanding is enormous. NVIDIA is the choice of AI development teams around the world seeking to infuse AI into existing products and services as they build out new and exciting ‘native AI’ services for GPUs and AI SDKs.Nvidia information blog
Nvidia pioneered GPUs (graphical processing units) which is why many people think it is well placed to benefit from an explosion in use of AI, vital for such things as autonomous driving. The company is a classic IP business, generating over $1m of sales per employee. I can easily imagine that at some unknown future date the business could be valued at $10 trillion.
I just imagine what AI could do for us. I think of my own case. I have written a book that is now in manuscript form. I ask my computer to prepare the manuscript as a hard copy book, a Kindle version and an audio book. Moments later this is done. Then I ask it to prepare a marketing programme which also speedily appears. I could even ask AI to edit the book. It seems a bit of a stretch to ask it to write it but who knows where all this is going. Many successful books, films, Tv series and the like are surprisingly formulaic when you look into them like the recent comic spoof suggesting that all Tom Cruise films follow a recognisable format – Tom is an amazing pilot or whatever; something happens to destroy his self belief; he meets a girl who gives him back his belief; he uses this renewed self belief to do something amazing. Apparently he does this again and again and again. I am sure he has something special. Cinema goers might be a tad disappointed if the film starred me instead of Tom but even so.
The problem with Nvidia is that there is as yet no strong chart reason to buy the shares. I have come to the conclusion that a Coppock buy signal alone is not really enough because as soon as the market turns decisively higher there are going to be loads of those.
What we need is a classic bullish chart configuration, a great company in an exciting industry and some kind of catalyst to bring in a new crowd of investors. We need to keep our scarce resources for investment in companies that are ringing all the bells. More and more this is what I feel I should be looking for; just one of those can be a game changer.
Nvidia goes on my short list but I am not going to buy any just yet. However if you want to buy some as part of a wider portfolio approach I expect them to do well over time.
Ashtead Group plays key role in rebuilding of America
Ashtead has a similar chart to that of Nvidia. This is not surprising because I am specifically looking for such charts. My theory is that shares in companies which combine exciting fundamentals with charts that look like consolidations in a continuing bull market will do well when the next bull market gets underway.
Ashtead has already done so well that it might seem hard to believe that it can continue to grow strongly but it is playing a critical role in a very large market. It doesn’t supply people but all the equipment they might need to operate can be rented from Ashtead. The beauty of this market is that it creates itself. Back in the day if you did not own stuff you could not get it and customers did not understand that on a life time basis renting is cheaper and more efficient than owning. Ashtead has changed all of that by building a huge network of branches across North America where well maintained kit is available at a fair price.
This has driven and continues to drive extraordinary growth. My impression is that Ashtead is the best equipment rental business in the world. It’s main rival is United Rentals, which is also worth a look because it has a great chart, at the moment even better that that of Ashtead.
Also impressive is the company’s confidence on the long-term outlook.
Longer-term outlook for our industry continues to be very favorable driven by several tailwinds that we believe are largely independent of macro conditions. And we’ve talked about these before, things like infrastructure spending, the Inflation Reduction Act and the return of manufacturing to North America as well as investments in both energy and power.Q4 2022, 25 January 2023
United Rentals is a big gun.
The acquisition gives United Rentals an additional 60,000 rental assets, 106 locations, and 2,100 employees. Ahern gives increased capacity for United Rentals to better serve its customers. United Rentals had 1,020,000 total equipment units and 1521 rental locations at the end of 2022. United Rentals is the largest equipment rental company in the industry with a 17pc market share (which includes the Ahern acquisition).Seeking Alpha, 30 January 2023
The more I look at URI the more impressed I am. The shares look like a buy on charts and fundamentals .An ETF holding the shares, Global X US Infrastructure Development (PAVE) also looks promising.
Synopsys and Cadence Design Systems are key players in the booming EDA market
There can be no doubt that Cadence Design Systems/ CDNS is on fire.
I am pleased to report that Cadence delivered record results for 2022 as we exceeded our guidance yet again, achieving 19pc revenue growth and over 40pc non-GAAP operating margin. Cadence’s innovative solutions are essential and especially relevant in the current environment, enabling customers to achieve their increasingly challenging design goals.
Secular megatrends such as 5G, hyperscale computing and AI/ML that are driving sustained long-term semiconductor and system growth remain unchanged. Amid ongoing macroeconomic uncertainty, companies continue making significant investment in their next-generation products, resulting in robust design activity. We expect our pioneering solutions to continue fueling broad-based business momentum in 2023, driving strong revenue growth and profitability. John will provide more details in a moment.
Our Intelligent System Design strategy greatly broadens our total available market and leading end-to-end EDA IP, hardware and expanding system analysis portfolio uniquely position us to capture a wide range of market opportunities. During the year, we introduced 9 significant innovative products across all of our business groups and we expect these to be key drivers of our future growth. The age of AI is upon us and Cadence provides several groundbreaking computational software-driven generative AI technologies at both the chip and system level unified by JedAI, our differentiated big data analytics platform. Our customers are seeing dramatic results, with these solutions delivering highly optimized designs and unprecedented efficiency gains. Additionally, by automating repetitive tasks and producing new ideas, our generative AI frees up engineers to focus on more advanced high-value activities, opening up more opportunities for innovation.
In closing, we are pleased with our strong execution in 2022 and are thrilled by the business momentum and market opportunities ahead of usQ4 2022, 13 February 2023
So what is electronic design automation (EDA) all about
EDA began as a captive capability. Before EDA was a market segment, large, vertically integrated OEMs operated captive chip design and manufacturing capabilities. These organizations employed large teams of software engineers to develop the required tools to automate the design, implementation, and verification of the chips that were manufactured. All chip production in this case was used by the OEMs to include in their own products.
Bell Laboratories, Texas Instruments, Intel, RCA, General Electric, Sony, and Sharp are examples of these companies. The birth of commercial EDA tools essentially happened in three phases.
The first phase began in the 1960s and saw commercial availability of computer-assisted interactive graphics design systems. These systems targeted multiple markets, including cartography, mechanical, and architectural design. These systems also found use for interactive design of integrated circuit layouts. The three primary companies leading this phase were Applicon, Calma, and Computervision. It is interesting to note that in these early days Calma developed a format to represent IC layouts called GDS, named after its product, Graphic Design System. The GDS II version of this format continued to be used as the de-facto format to communicate IC layout information for decades. This phase of the industry was known as CAD/CAM (computer-aided design/computer-aided manufacturing).
The second phase of EDA began in the early 1980s. Something rather significant happened during this time – the commercial application-specific integrated circuit, or ASIC, industry was also born. With the emergence of the ASIC industry, the custom chips that were previously reserved for the very large system OEMs were now within reach of many more design teams. This began the semiconductor revolution that continues today. Early ASIC companies include LSI Logic and VLSI Technology. With this new market, the need for tools to automate the simulation, design, and verification of chips became far more widespread. This development spawned many new companies to serve the need. A lot of the internal, captive teams at the large OEMs found new, exciting, and lucrative work in this new market and so the commercial EDA industry began to grow.
During this phase, the primary focus was on software and some special-purpose hardware to capture the description of a design and simulate it. The three primary companies leading this phase were Daisy Systems, Mentor Graphics, and Valid Logic. This phase was known as CAE (computer-aided engineering).
In the latter part of the 1980s, the EDA industry began to mature as its third phase began. Point-tool companies were replaced with broad-line suppliers of multiple software and hardware products aimed at automating a larger portion of the IC design process. The three primary companies leading this phase were Synopsys, Cadence, and Mentor (now Siemens EDA). This phase saw the birth of the term EDA (electronic design automation). Today, many still identify with this phase of the industry. The three leading companies remain the same.
With the dramatic expansion of semiconductor technology, there is a movement toward a need for a larger platform of tools and technologies which may signal the next phase of the industry’s development.Synopsis briefing on EDA
Synopsys is the biggest company in EDA and doing well.
To give you a relative sense of proportion, Design Automation is about 65pc of our revenue. Design IP is approximately 25pc and Software Integrity is about 10pc. We have leadership positions and excellent outlooks in all three segments. As the market leader in design automation, we see continued technical innovation towards still much, much more complex silicon and system designs.
We see our purpose to be a key catalyst enabling the smart everything world. With our customers and partners, our role is to make this all work to the state-of-the-art solutions ranging from the deep physics of silicon to the heights of performance, power and security of complex hardware software systems.
Over the past several years, we have successfully invested in groundbreaking innovations that radically advance how silicon and system design is done.Q1 2023, 15 February 2023
I just want to say enough to establish that Cadence Design Systems and Synopsys are phenomenally exciting companies. Siemens, the German company which owns Siemens EDA, the third largest electronic design automation business, is exciting too but I prefer the two specialists.
In this alert I want to introduce a new strategy that I think holds great promise. This is the combination of a high powered ultra long term chart, plotted where each candlestick represents 12 months, with outstanding fundamentals. The last element in the mix could be and often is a buy signal from Coppock.
I think shares with these characteristics, which includes all the above, can be bought now AND into weakness. Normally I don’t like to do that but in the case of shares with these characteristics I think the potential is so positive that it makes sense.
Ultimately I would hope to see an upside breakout from these consolidations when it would make sense to add to your positions.