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Morning Report: Playing a cyclical rebound at Photon Control 

January 9, 2020 

Canada's morning overview of insider filings with a special focus on companies that may interest active and momentum-oriented investors

Overview: Sentiment and Stocks

Within the Technology sector, semiconductor industry stocks are probably the most exposed to the ups and downs of the economy. Whereas software and internet service stocks are often seen as long-term bets on company-specific growth prospects and do well in a low rate environment, the fortunes of semiconductor stocks may actually do better if investors believe there will be growing demand for gadgets such as cellphones that use microchip components. TSX-listed Photon Control (PHO) makes optical sensors and measurement systems which are sold to wafer fabrication equipment manufacturers who supply clients in the semiconductor industry. While it has been making some progress at diversifying exposure to the industry, Photon's fortunes remain deeply tied to the economic conditions facing the semiconductor business.

This was evident in the most recent semiconductor industry downturn last year. In the Q2 2019, the company reported a sales drop of 51% to $7.1 million versus $14.6 million in the same quarter a year earlier. However, signs of a rebound emerged in Q3 as sales improved sequentially to $8.7 million. Net income for Q3 came in at $0.01 per share, the same as Q3 2018. Gross margins rose in Q3 to 54.8% versus 51.7% a year earlier, which suggests Photon is participating meaningfully in a bit of an industry rebound. Meanwhile, analysts have boosted their sales outlook for the full year to $32 million, up from $30 million according to Refinitiv. Moreover, the modest upgrade was the first positive revision to the outlook in 2019 which had seen three quarters of downgrades in a row. Importantly, insiders have bought over the past year as Photon and the industry faced headwinds. With that in mind, for investors who believe global growth may surprise on the upside thanks to central bank and trade tension easing, Photon Control is one way to play the economic acceleration theme.