A gain of 60.24% in 2019 for shares of Synopsys, Inc. (SNPS) tells a story of a stock gaining alongside a high amount of unusual trading activity. It's a bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved.
This stock is interesting because the software sector has been on fire this year. Synopsys is leading the charge in the growing silicon-to-software space. Its solutions have been a strong area of growth that should continue.
Synopsys Strong Fundamentals and Solid Technicals
Smart money managers are always looking to bet on the next outlier stocks…the best in class. The main criteria we look for when betting on the upside in stock are a history of strong fundamentals, solid technicals, and unusual trading in the shares.
I'll go into the fundamental picture later, but the true tell on the near-term trajectory of the stock lies in its trading activity. Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For 2019, Synopsys stock has clearly been in demand.
For Mapsignals, when we look for an entry on a leading stock, we want to see an increase in potential buying. Just to show you what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals Synopsys stock has made over the past year.
Focusing on 2019, you can see a lot of buy signals (green) that line up with a lift in the shares. This is exactly the kind of setup we look for at our research firm. We want to bet on the best … period. This move is notable because stocks move based on supply and demand. This is a chart showing a big demand:
So far in 2019, Synopsys stock has logged 17 unusually high-volume days, indicative of buying in the shares (see chart above). But what gets our attention now is that Synopsys is still gaining quietly but in an unusual way, which suggests that demand for the stock is increasing.
If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also don't want to fight a stock that shows increasing-price alongside an increase in the volume traded. Someone could potentially be accumulating a position.
Looking for Tomorrow's Top Stock Picks
Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.
When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. The following are a few areas that have grabbed our attention year to date (YTD):
- YTD outperformance vs. market: +40.23% vs. SPDR S&P 500 ETF (SPY)
- YTD outperformance vs. sector: +29.17% vs. Technology Select Sector SPDR Fund (XLK)
- Recent bullish unusual trading signals
Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2016 when Synopsys stock has made buy signals for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we have been all over the massive run-up over the past few years. For now, this stock is setting up to be an outlier:
On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Synopsys' latest earnings report showed solid growth:
- Q2 2019 YoY revenue growth rate: +7.6%
- Q2 2019 YoY net income growth rate: +14.92%
Synopsys is breaking out to highs and growing rapidly. We like the long-term story of the stock. The narrative for Synopsys and other high-quality software companies is one of huge growth. We are always on the lookout for great companies showing the usual trading activity in the shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.
The Bottom Line
Synopsys represents a potential buying opportunity for the long-term investor. Given the lift in price, historical fundamental outperformance, and recent unusual accumulation signals, this stock could be worth a spot in a growth-oriented portfolio.
Disclosure: The author holds no position in Synopsys shares at the time of publication.
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