Technically, RF Micro Devices Is a Buy

We examined RF Micro Devices (Nasdaq: RFMD  ) using moving average convergence-divergence, which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

There are many ways to interpret MACD, but a common interpretation is signal line crossover. Signal line crossover uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below you can find a current chart of RF Micro Devices' MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a moving average convergence-divergence chart! While we jest, it's actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 16 times!

Want to buy RF Micro Devices today? Technically, odds are that you should flip and sell RF Micro Devices sometime very soon. If that sounds like madness to you, well, we here at the Fool agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race to schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time most technical analysis schemes are a relative simple science: eliminating the vast complexities of evaluating true company value. It's an attractive theory, but one that is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with 80% of market trading now done by Ph.D.-level programmers at massive high-frequency funds, even if opportunities existed, what chance does an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to studies. There was Massey University's study across 49 countries that showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier. RF Micro Devices crossed the crossover 16 times across the past year! The amount of trading in most technical analysis schemes eats away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's the antithesis of what we preach at Fool.com. Here are the areas that interest us when we look at RF Micro Devices and its peers:

Metric

RF Micro Devices

Broadcom (Nasdaq: BRCM  )

Skyworks (Nasdaq: SWKS  )

Market cap

1.11B

18.11B

3.17B

Quarterly rev. growth (YOY)

51.40%

65.30%

44.00%

Revenue (TTM)

978.39M

4.88B

986.71M

Operating Margin (TTM)

11.29%

4.98%

16.85%

P/E (TTM)

16.33

51.82

22.17

PEG (5-year expected)

0.41

0.92

1.05

YOY = year over year. TTM = trailing 12 months.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These are areas that led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at RF Micro Devices, don't evaluate it for crossing a momentum line. Buy or sell it because:

  • Like Skyworks and Broadcom, the company has great exposure to the mobile segment. With IT firm Gartner estimating that smartphone growth is going to accelerate at a jaw-dropping 28% compounded annual growth rate between 2009 and 2014, RF Micro Devices and its peers should be well-positioned to cash in, even if other areas of the semiconductor business show weakness.
  • Buy RF Micro Devices because after years of struggles the company seems to have hit its stride. Over the past 12 months, return on equity has soared to 18.8% and earnings are hitting record levels, yet the stock is still trading below levels seen in the middle of the decade. On a forward basis, RF Micro Devices still trades for less than 6.8 times earnings despite its strong positioning in the future of mobile device growth.
  • Despite former reliance on major customer Nokia, RF Micro Devices has managed to broaden its customer base. While Nokia still accounts for a whopping 44% of sales, that's down from 59% a year ago. While the sheer size of the mobile device boom benefits RF Micro Devices, the breadth is also helping it diversify into a larger customer list.

These are the factors that will drive RF Micro Devices' long-term wealth. Best of all, establishing a portfolio of well-managed companies with strong advantages over their competitors spares you having to sit bleary-eyed in front of a computer, buying in and out of companies with a Big Gulp full of coffee. That's the kind of future I'm looking for. Although, if your idea of protecting your future is charting the ups and downs of moving average convergence-divergence charts, then I recommend buying RF Micro Devices right now.

Jeremy Phillips owns shares of no companies listed above. Nokia is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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