My investment philosophy is somewhat simple. Fundamental analysis tells us what we should buy and what we should sell, while technical analysis and sentiment analysis tells us when to buy and sell. With the stock market as a whole making such big upside moves over the past three months, and over the past year for that matter, it has been a little more difficult to find good quality stocks that aren’t in overbought territory.

Even low quality stocks, from a fundamental perspective, have seen some impressive gains in many cases. In fact, there were certain periods over the past year where low quality stocks seemed to be outpacing high quality stocks. Investors were basing their investment decisions on the status of stimulus plans that they believed would help certain industries rather than basing their decisions on the quality of the stock before and after the pandemic.

One company that I’ve been watching for a number of years, but have been stalking it recently is Qualcomm (QCOM). The company is known for its semiconductors that go into mobile devices and it has seen strong earnings and revenue growth in recent quarters, but we will get to that in a moment.

The weekly chart for Qualcomm shows why I have been stalking the stock. From a low of $57 last March to a recent high just below $168, the rally has been impressive over the last 11 months. There have been very few dips of any consequence and the overbought/oversold indicators have been in overbought territory for most of the last seven to eight months.

Over the last month, the stock has pulled back approximately 14.7% from the peak in January. The pullback has caused the weekly stochastic indicators to drop below the 50-level for the first time since last spring. It looks like the indicators will continue lower in the coming weeks and could reach oversold territory.

The 10-week RSI is just above the 50-level and that is a level the indicator hasn’t crossed below very often. In fact, it has only been below the 50-level twice in the last two years, in early 2o19 and last March.

Watching the OB/OS indicators is certainly something I am doing, but I am also watching the trend channel that has formed on the stock. The lower rail connects the low from last March with the low from July. The upper rail connects the highs from November and January with the pre-meltdown level from last February. The lower rail is currently hovering around $136 with the stock trading at $143.25.

Ideally, we would see the stock drop to its lower rail just as the stochastic indicators reach oversold territory. We could even wait for the stochastic indicators to make a bullish crossover as a confirmation point if we wanted to be a little more cautious. The main point is that we have a fundamentally strong company that is trading well below where it was just a few weeks ago and now we want to buy it at a discount.

Earnings and Revenue Jumped Sharply in Fiscal Q1

Qualcomm reported fiscal first-quarter 2021 results on February 3. The growth in the EPS was phenomenal at 119% compared to the previous year and revenue jumped by 62%. Those growth rates are considerably better than what the company has been averaging in recent years.

The return on equity for Qualcomm is extremely high at 92.1% and the profit margin is well above average at 24.4%. When we combine those two statistics with the revenue growth, it explains why the company’s SMR rating on Tickeron is extremely good at 6. The best score a company can get in this rating is 1 and the worst is 100.

In addition to the really strong SMR rating, Qualcomm also gets high marks in the Profit vs. Risk Rating (7) and the Valuation Rating (9). The company doesn’t really get any negative marks on the fundamental side except for seasonality.

Looking forward, analysts expect earnings to grow by 89.8% in the second quarter and by 74.9% for the year. Revenue is expected to jump 46.3% in Q2 and by 43.4% for the year as a whole. That should keep the SMR rating low for the foreseeable future.

I mentioned that the Tickeron Valuation Rating is 9. This indicates that the company is seriously undervalued in the industry. This rating compares market capitalization estimated by our proprietary formula with the current market capitalization. This rating is based on the following metrics, as compared to industry averages:

• The P/B Ratio
• The P/E Ratio
• Projected Growth (PEG Ratio)
• Dividend Yield
• P/S Ratio

The combination of these valuation metrics is what gives Qualcomm such a strong valuation rating.

Investors and Analysts aren’t as Bullish as They Should Be

Turning our attention to the sentiment toward Qualcomm, I found that the sentiment indicators were only average. There are 30 analysts covering the stock at this time with 20 “buy” ratings, nine “hold” ratings, and one “sell” rating. This puts the overall buy percentage at 66.7% and that is in the average range between 65% and 75%.

The short-interest ratio is at 2.16 currently and that is a little below the historical average. Current short interest ratios seem to be a little lower across the board, especially after the big short squeezes we saw in January. Qualcomm’s short interest ratio has been as low as 1.0 in the past year and it has been as high as 3.02, so the current reading is slightly above the mean.

While the sentiment indicators are average, I was a little surprised there wasn’t more optimism being expressed toward Qualcomm. The earnings and revenue growth in recent quarters is among the best I’ve seen. The ROE is extremely high and the profit margin is above average. Given those factors, I would have expected the buy percentage from analysts to be much higher and I kind of expected the short-interest ratio to be lower.

Looking at the whole picture for Qualcomm, the fundamentals are great, the sentiment has room to grow more bullish without it being too optimistic, and the current pullback could be providing a great buying opportunity. Right now, I’m exercising patience and watching to see of the stock gets down to the lower rail of its channel over the next few weeks. It would be a bonus if the stochastic indicators reach oversold territory and then experience a bullish crossover.