Thanks to investor excitement over Cirrus Logic’s chips featuring heavily in Apple products, the stock has enjoyed a tremendous ride up. It has appreciated close to 80% from previous lows. While this appreciation is impressive, current investors and as well as potential shareholders, should pay attention to market fundamentals that may hold the stock back. In broad strokes, the stocks price has exceeded its value. In fact, if you are chasing solid returns on your investment, it might be a good time to get off this stock and ride another stock in another industry or within the technology hardware industry for healthier returns.
One of the most basic investment rules any newbie investor has to learn is market timing. You want to get in and out of a stock at the right time. Otherwise, it is too easy to hang on to a stock that appreciates on paper and generates a paper profit. However, if you hang on to it for so long that when it crashes back to earth, you actually end up losing money. Similarly, you don not want to let go too early and miss the tremendous ride up. Well, after an 80% gain, it appears that Cirrus Logic (NASDAQ:CRUS) does not really have much of an upside left to go.
Looking at this company’s competitive advantage in its industry, it is easy to conclude that it really does not have a competitive advantage. It is under tremendous pricing pressure. Also, it is overly dependent on Apple Computers to buy its chips. This is a serious problem because Apple has a tremendous bargaining power that can drive profit margins lower for Cirrus Logic. The stock is a great buy at less than 20 dollars a share.
However, since it has broken way past that price range, it is a good time to unload because the risk of this company losing value is much higher than the upside. You only need to look at its operating income margin, asset turn overs, and equity multiplier to get a clear understanding that the return on equity is not looking all that good in the midterm.