Watch Out: Barbarians At The Gate For Mellanox Technologies (MLNX)

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified Mellanox Technologies ( MLNX) as a "barbarian at the gate" (strong stocks crossing above resistance with today's range greater than 200%) candidate. In addition to specific proprietary factors, Trade-Ideas identified Mellanox Technologies as such a stock due to the following factors:

  • MLNX has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $24.8 million.
  • MLNX has traded 489,086 shares today.
  • MLNX traded in a range 206.3% of the normal price range with a price range of $2.74.
  • MLNX traded above its daily resistance level (quality: 8 days, meaning that the stock is crossing a resistance level set by the last 8 calendar days. The resistance price is defined by the Price - $0.01 at the time of the signal).

Stocks matching the 'Barbarian at the Gate' criteria are worthwhile stocks to watch for a variety of factors including historical back testing and volatility. Trade-Ideas targets these opportunities because the stock is exhibiting an unusual behavior while displaying positive price action. In this case, the stock crossed an important inflection point; namely, 'resistance' while at the same time the range of the stock's movement in price is more than twice its normal size. This large range foreshadows a possible continuation as the stock moves higher.

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More details on MLNX:

Mellanox Technologies, Ltd., a fabless semiconductor company, produces and supplies semiconductor interconnect products for computing, storage, and communications applications in the high-performance computing, Web 2.0, storage, financial services, database, cloud, and embedded markets. MLNX has a PE ratio of 757.4. Currently there are 4 analysts that rate Mellanox Technologies a buy, no analysts rate it a sell, and 8 rate it a hold.

The average volume for Mellanox Technologies has been 805,300 shares per day over the past 30 days. Mellanox has a market cap of $1.7 billion and is part of the technology sector and electronics industry. The stock has a beta of 0.45 and a short float of 15% with 9.98 days to cover. Shares are down 36.2% year-to-date as of the close of trading on Wednesday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates Mellanox Technologies as a hold. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity.

Highlights from the ratings report include:
  • MLNX's debt-to-equity ratio is very low at 0.00 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 4.50, which clearly demonstrates the ability to cover short-term cash needs.
  • The gross profit margin for MELLANOX TECHNOLOGIES LTD is currently very high, coming in at 74.27%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -5.20% is in-line with the industry average.
  • MLNX, with its decline in revenue, underperformed when compared the industry average of 10.0%. Since the same quarter one year prior, revenues fell by 33.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Net operating cash flow has significantly decreased to $16.42 million or 77.91% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Semiconductors & Semiconductor Equipment industry and the overall market, MELLANOX TECHNOLOGIES LTD's return on equity significantly trails that of both the industry average and the S&P 500.

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