⭐️ Spotlight Hour: From Near Penny-Stock Status to Industry Leader | Trade Stocks

From Near Penny-Stock Status to Industry Leader

By Wed, Nov 25, 2020

Lip-Bu Tan has some pretty thick skin. Tan is the CEO of software firm Cadence Design Systems (CDNS), a San Jose, California, company founded in 1988. When Tan took the reins in 2009, Cadence was in the dumps. The stock was trading at seven-year lows, near penny-stock status, and revenues had all but dried up. Not only was the company suffering from the Great Recession, but it was having a difficult time holding on to its client base.

In that first year, Tan held hundreds of listening sessions with the firm’s corporate customers. He got an earful. He asked them one question: What grade would you give our products? “One of our first meetings was with one of our most demanding customers,” Tan recalled in a November 12 interview. “I got quite a few Ds and a few Fs.” Rather than get defensive, however, Tan listened attentively, gathered information, and used that information to build a better product line.

“ told me I was a very brave man for asking his opinion.” Tan says that that same customer “now views me as a trusted partner.”

That was 11 years ago. Today, Cadence Design is the world’s leading software firm producing the design blocks that companies use to build, test, and improve integrated circuits. While larger competitors such as Synopsys (SNPS) and Autodesk (ADSK) do the same thing, Cadence, with a $30.9 billion market cap, is the largest pure play in the space, and is leading the pack of 11 other companies in earnings growth this year (188% year on year vs. an industry average of just 9%), quarterly sales growth (15% quarter on quarter), margins (43% profit margin), and return on equity (48.3%). These figures peg CDNS at a 98 Comp rating (out of 99) on Investor’s Business Daily. That’s eight points above Synopsys and a full 22 points above Autodesk.

Forward earnings prospects also look great at Cadence. At its last earnings report last month, the company announced that it was raising earnings estimates 23% over the previous estimate. This move earned the company a Zacks Rank of 1, or “strong buy.” This move also prompted 5-star analyst Mitch Steves of RBC Capital to raise shares of CDNS to a “buy” rating earlier this month. Steves has issued 17 ratings on the company over the years, each one of which proved to be profitable. The average return following each of his calls yielded a one-year ROI of 33.9%. When Steves talks, it’s time to listen.

Another reason to like Cadence Design is its cash flow. Whereas mature companies can rely on large lines of credit to fund their capital expenditure plans, cash is king for growth companies. Here, Cadence really shines among peers. Its year-over-year cash flow growth for 2020 is 139%, which is far above the 5.7% that is average for most software companies. Moreover, its average annual growth rate of 24.6% over the past five years compares favorably to the 8.5% average pegged by its peers.

So how did Tan produce such a great turnaround story at Cadence? There are many pieces to that puzzle, but one thing he did – and perhaps the most important thing – was to create a culture of teamwork among employees. To this end, Tan redesigned his organizational chart as a circle. He streamlined the hierarchy to a skeletal staff and distributed that authority to department heads. Tan then encouraged department heads to consider themselves as VPs and asked them to pursue cross-disciplinary cooperation with other departments.

“ understands the power of a strong team to be successful,” said Joshua Tilton, equity research analyst at Berenberg.

Tan also embraces adaptive learning, an educational model based on the kind of learning from customers, rather than consultants, that marked his first year in office. With critical feedback from end-users, Tan seeks input from employees at all levels of the corporation as together they brainstorm ways of responding to customer problems with customized solutions.

One of Tan’s company mottos is good advice for all of us: “A problem can become a big volcano if you don’t jump on it when it’s flashing yellow. You want to get to it before it flashes red.”

Action to Take: I like shares of CDNS up to a price of $118. Hold for one year, or a price of $180, whichever comes first.

 


SPONSORSHIP

Up to 100,000 companies now using “6G”?

Jeff Brown has made some incredible revelations before…

The angel investor predicted the top tech stock on the S&P 500 in three of the last four years…

He unveiled the key piece inside Apple’s new iPhone – on stage in New Haven, CT – months before the phone has even hit the market.

In this video, I’m going to give you the name of this company for free – including the stock symbol.

About the Author

Dr. Thomas Carr (aka “Dr. Stoxx”) is the founder, CEO and Chief Market Strategist for Befriend the Trend Trading, LLC, which oversees the "Dr. Stoxx" brand of stock-picking newsletters (DrStoxx.com) and trader training resources. Dr. Carr has been active in the markets since 1996. Along the way he authored four bestselling books on the stock market that have been translated into Chinese, Korean, and Japanese.