A gain of approximately 20% the past three months for shares of Xilinx, Inc. (XLNX) tells a story of a stock gaining alongside a high amount of unusual trading activity. It's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved. Over time, we've learned how stocks with a history or strong fundamentals tend to rise in price. 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 upside in a stock bouncing after a period of pressure include a history of strong fundamentals, strong technicals and big potential buying 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 most of 2018, Xilinx stock was in a nice steady uptrend. Shockingly, with the monster sell-off in the market in late 2018, shares massively outperformed, with no unusual sell signals. In our view, pullbacks = opportunities, especially a pullback we see as mechanical in nature.
For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you graphically what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals Xilinx stock has made over the past year. Beginning in July, there were many days when the shares appeared to have a buyer. However, what jumps out at us is that, when the market experienced a meltdown beginning in October, Xilinx did not show any unusual sell activity in the shares. That is super rare. This is notable because stocks move based on supply and demand. What is really catching our eye now is the re-emergence of recent UI buying:
Since late October 2018, Xilinx stock has logged five unusually high-volume days, indicative of buying in the shares starting on Oct. 31, 2018 (see chart above). However, what gets our attention now is that Xilinx is 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 do not want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.
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 grab our attention when it comes to Xilinx stock:
- One-year outperformance vs. market: +26.08% vs. SPDR S&P 500 ETF (SPY)
- One-year outperformance vs. sector: +25.71% vs. Technology Select Sector SPDR ETF (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 2017 when Xilinx made the buy report for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we caught the stock breaking out in late 2018. We'd even venture to call this stock 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, Xilinx's latest earnings report showed solid growth:
- Q3 2019 year-over-year revenue growth rate: +34%
- Q3 2019 year-over-year non-GAAP net income growth rate: +42%
Xilinx is breaking out today after a huge quarter beat and raise. We believe that the current level for the shares is in position for further upside. The narrative for Xilinx and high-quality semiconductors is one of dominating the space. I am always on the lookout for great companies showing 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
Xilinx stock represents a potential buying opportunity for the long-term investor. Given the lift in price, historical fundamental outperformance and recent unusual buying signals, this stock could be worth a spot in a growth-oriented portfolio.
Disclosure: The author holds no position in Xilinx shares at the time of publication.