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Investors Business Daily

IBD 50 Stocks To Watch: Chip Leader Allegro MicroSystems Breaks Out, But There's Reason For Caution

Tuesday's IBD 50 Stocks To Watch pick — chip leader Allegro MicroSystems — is one of the top stocks to buy and watch, as it trades in buy range past its latest buy point. But there is reason for caution, as ALGM shares fell midday Tuesday.

Stocks To Buy And Watch: Allegro MicroSystems

Allegro is a designer, developer and marketer of specialized integrated circuits used mostly in automobile and industrial markets. The devices also show up in a range of consumer and computer segments. These integrated circuits — or ICs — can precisely measure motion, speed, position and current in a wide variety of environments and applications.

The company's product line includes integrated circuits for power management, such as chips designed to enhance the performance of motors used in electric vehicles. The company says its ICs also can determine the performance of transmissions and other key parts of a car. In addition, Allegro develops technology for light-emitting diodes in lighting for autos.

In late October, Allegro MicroSystems reported stronger-than-expected fiscal Q2 results, sparking an over-5% advance. The company earned 31 cents per share on revenue of $237.7 million, topping estimates that called for EPS of 26 cents on sales of $225 million. Quarterly earnings and sales grew 55% and 23%, respectively, vs. the year-ago period.

Allegro's IBD Stock Ratings

This stock to buy and watch shows a strong 98 Earnings Per Share Rating, out of 99, and an SMR Rating of "A," according to IBD Stock Checkup.

Over the last four quarters, Allegro's EPS growth ranged from 33% to 55%, according to MarketSmith. Earnings are expected to jump 50% for the fiscal year ending in March before rising 6% in fiscal 2024. It booked a solid 23% pretax profit margin in fiscal 2022, as well as a great 23% return on equity.

Boasting a perfect 99 IBD Composite Rating due to strong fundamental and technical metrics, Allegro stock is the top-ranked stock in the chipmaking industry group. Among the other chip leaders, Impinj is falling below an alternate entry at a 119.79 buy point amid a potential four-day losing streak. Shares slid more than 2% Tuesday. Impinj is an IBD Leaderboard stock.

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ALGM Stock Breaks Out

ALGM stock broke out Monday past a 32.07 buy point in a cup with handle after the S&P Dow Jones Indices announced that Allegro will join the S&P MidCap 400. Shares rallied more than 3% Monday in heavy volume, which is a sign of big institutional demand and a crucial condition of a successful breakout.

Shares are in the 5% buy zone that goes up to 33.67, according to IBD MarketSmith chart analysis. Meanwhile, the relative strength line hit a new high during the stock's Monday breakout, confirming Allegro's status as a market leader. The RS line measures a stock's price performance vs. the S&P 500.

However, there are a few reasons to be cautious.

First, Allegro's cup with handle is 50% deep, which is abnormally deep. Next, the handle doesn't appear on a weekly chart, only on the daily chart, which means that Allegro hasn't consolidated much of its gains from its ongoing seven-week win streak. It would be normal for the stock to pull back from this level and form a more proper handle, maybe two or three weeks long on the weekly chart.

Despite these concerns, Allegro MicroSystems is one of the top stocks to buy and watch in the current market.

Follow Scott Lehtonen on Twitter at @IBD_SLehtonen for more on top stocks to buy and watch and the stock market.

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