In the Week 2 Breakout Forecast for January 5th, I identified KEMET Corporation (NYSEARCA:KEM) as a breakout stock at an initial share price of 16.57. Today I am writing a more in depth analysis of the stock and why I think it can reach a price target of $24 per share with short-term price growth of over 40% from my initial purchase point.
KEMET Corporation, together with its subsidiaries, manufactures and sells passive electronic components under the KEMET brand worldwide. The company operates through two segments, Solid Capacitors, and Film and Electrolytic. Its products include tantalum, multilayer ceramic, film, electrolytic, paper, and solid aluminum capacitors, as well as EMI filters.
The company offers its capacitors for use in the automotive, communications, computer-related, industrial, consumer, military/aerospace, and alternative energy industries. KEMET Corporation sells its products to original equipment manufacturers, electronics manufacturing services providers, and electronics distributors. The company was founded in 1919 and is headquartered in Simpsonville, South Carolina.
Technical Analysis to support a substantial breakout:
One of the most common and reliable technical formations is called the Head and Shoulders pattern. The pattern works well for identifying tops and the inverse pattern is also quite effective for finding bottoms. What are seven confirming characteristics of a Head and Shoulders Bottom?
- Stock was in a prior down trend: Yes - in early November the stock declined from 26 down to 14.
- The low of the left shoulder formed with a large spike in volume on a sharp down day: Yes - Largest volume spike on the chart corresponds to the fall of left shoulder.
- A reaction rally formed the first point of the neckline: Yes - a positive price rally formed the first point of the neckline at 17 on the chart.
- The price decline to the lows that formed the head were dramatic, but volume did not increase measurably: Yes - price declined approximately 18% to lows around 14, but volume remained relatively low and did not spike.
- The advance off of the low saw a large expansion of volume and gap up: Yes - price increases from the low (head) show price gap upwards on strong (green) increasing volume.
- A second reaction rally formed the second point of the neckline: Yes - a positive price rally from the lows formed a second point of the neckline around 16.5.
- The advance off the low of the right shoulder occurred with above-average volume and the money flow was at its highest levels: Yes and Yes - The volume is increasing, the money flow is reaching highs not seen since early November (but on an upswing) and the neckline was crossed and supported in the first week of January.
The KEM chart above is a textbook case of the Inverse Head and Shoulders breakout pattern. Other technical indicators also support the evidence of a strong momentum breakout.
- The Relative Strength Index is crossing upwards to new highs not seen since late September 2017 when KEM went on a 35% run to $27/share.
- ADX (14) oscillator shows that higher price highs are now outpacing lower lows in a significant trend shift that began in the first week of January and has not occurred previously since late September 2017.
- The Ultimate Oscillator, another validating price measure oscillator clearly shows a strong positive momentum shift at the start of 2018.
From the view of Point & Figure charting, KEM price movement has signaled a Double Top Breakout on 12 Jan and is well on its way for added positive momentum:
So where do I think KEM is headed?
The consensus analyst target is at 20.75. I agree with those stock analysts, however, from a technical perspective a move to 20 would also clear the prior resistance and likely make a quick fill of the large gap to 24 where the next level of resistance is formed. Based on the expected price behavior from a head/shoulder bottom, a 20% upside move is likely and could carry as high as 36% above today's prices over the next several months (44% above the price selected in my Week 2 Breakout article).
While all these indicators, patterns, and oscillators provide some degree of validation that a breakout is underway, there are other factors to consider as well. Technical price indicators may not be reliable enough and it is always wise to look at the fundamentals of a company -- even begin the selection process there first, when you are looking to invest good money.
Fundamental and Ratio Analysis to support a substantial breakout:
First, I will highlight some of the key fundamental performance metrics that have me very bullish about KEM. Starting with earnings per share, KEM has posted strong EPS numbers to close out 2017 with tremendous growth over 2016. Additionally the current trailing twelve month EPS for KEM is at 4.91 with EPS Q/Q growth at 305.10%.
The ratios and valuations of KEMET Corporation are quite outstanding. From the low P/E and Forward P/E ratios to very strong earnings numbers and forecasts. A table of recent key ratios paints a very positive picture below:
Additionally the sales growth has generated 61% increases quarter over quarter for KEM with recent quarterly revenue and gross profits delivering very well on the top line. The income statement shows a very strong operation that is really picking up momentum in the most recent periods:
Key fundamental financial ratios that evaluate the health of the business all look remarkably strong. There is a clear positive trend of increasing cash liquidity and increasing margins from top (gross) to bottom (profit) as illustrated in the table below:
Significant recent events for KEMET Corporation include:
- The Defense Logistics Agency has accepted KEMET’s qualification of C0G and BP dielectrics to MIL-PRF-32535 “M” and “T” levels making them the first base metal electrode MLCCs qualified for defense and aerospace applications.
- KEMET Corporation recently announced that their headquarters will be relocated from South Carolina to 1 East Broward Blvd. in Fort Lauderdale, Florida. They will take occupancy in the later part of the first quarter 2018.
- The financial results for the third quarter ended December 31, 2017 will be released on Thursday, February 1, 2018 before market open. KEMET Corporation (KEM) will host a conference call at 9:00 AM (EST) To access the call via telephone, participants in the United States should dial 1-800-416-8033, and participants outside the United States should dial 1-706-643-0979. Participants should reference "KEMET Corporation" and Conference ID #5696064.
Conclusion
Based on the technical and fundamental factors that I have examined from many sources and highlighted throughout this article, KEMET Corporation has strong characteristics for excellent price performance in the coming months.
The last similar individual stock breakout analysis I conducted was on Denbury Resources (DNR). The stock was selected by algorithm for my subscribers in the Week 45 Breakout Forecast of November last year. In fact just yesterday, DNR reached my price target of $2.50 with a price gain of over 89% since my initial report in November.
KEMET Corporation looks to be another good story for the short term and I hope many others are able to benefit from the excellent performance this company is delivering.
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JD Henning, PhD, MBA, CFE