SemiConductor Index (blue) vs. S&P 500 (red)
Low Inventories and strong demand have created the set up for the recovery shown in the chart. As always, not every stock in the sector has seen a big rebound. So, let’s take a look at 3 opportunities in this sector, namely Intel Corporation (NASDAQ:INTC), Cypress Semiconductor Corporation (NASDAQ:CY) and Marvell Technology Group Ltd. (NASDAQ:MRVL).
You look Marvell-ous
With the tablet revolution and increasing growth in smartphones, the ongoing boom in electronics is creating plenty of opportunities for chip companies. Marvell supplies large quantities of tiny chips to companies like Cisco Systems, Inc. (NASDAQ:CSCO), Dell Inc. (NASDAQ:DELL) and Toshiba, to name a few. Marvell has focused on networking and storage lately (supplying parts for the solid-state drive market) and is now playing catch-up in mobile.
On the shareholder friendly side, Marvell recently announced a $500 million buyback program. By doing so, it guarantees earnings growth faster than the average S&P 500 company, even if they see zero revenue growth over the next year. Legendary investor David Einhorn (who I spoke more in-depth about in a previous blog about his war on Apple) has seen these numbers and already owns shares. As of this writing Marvell shares are trading at nearly $10.5, a discount to Einhorn’s cost basis of 13.5. Plus, Marvell pays a 2.5% dividend while you wait for its growth.
Don’t confuse Cypress with Cyprus
I’ve always been a fan of Cypress CEO T.J. Reynolds’ rags to riches story. His no nonsense approach to leading earned him the “100 people who changed the world” distinction in Upside Magazine. Cypress had a horrible 2012, falling nearly half. Despite a weak earnings report back in October, they generated $52 million in free cash flow that quarter. Similar to Marvell, the company is buying back shares and is using the cash to pay a generous 3.9% dividend.
Currently trading around a cheap 11 times earnings, I expect shares to outperform going forward, especially since the shares have stabilized, having not hit a new low since November. Also, small cap stocks have led the way in 2013, and that should boost Cypress as they are the “small cap” Intel. This Cypress will not be needing a bailout of any kind.
Don’t ignore the gorilla
I am still pounding the table for Intel, one of the safest, high yielding, great businesses in the world. IIntel Corporation (NASDAQ:INTC) has been ramping up R&D spending. Some have complained Intel has lagged getting into the mobile phone chip market, yielding to competitor ARM Holdings. But ARM doesn’t own chip making plants and Intel can build a cutting edge chip plant for around $5 billion.
Being the 800-pound gorilla of the semiconductor group, they outspend their competition and have a huge talent pool, making them the top innovator. With $18 billion in cash and around $13 billion in debt, it could literally pay its debt and still have billions left over. And they distribute that cash to their shareholders in the form of a nice 4.3% dividend (which they have increased in 18 of the past 20 years and never cut) and also institute share buybacks. Even if it goes nowhere in the next few years, you’ll still get their inflation beating dividend that they can still easily increase having that stellar balance sheet.
The takeaway
Investor friendly share buy backs, generous dividends, and unfairly depressed share prices, coupled with the exploding mobile phone market make it hard to go wrong in these names. Besides investing in these stocks for the hardware, It is also possible to capitalize on the software that these company’s products will power in the future.
For example, I have recently subscribed to a new app that allows even the common person to profit from the mobile app industry without being a developer. A no brainer investment for the price of 2 cups of coffee per month. It is just one example of the type of revolutionary products emerging from the mobile industry. And one of the tangible reasons the semiconductor companies are putting their big bucks to work for.
The article These Semiconductors Shall Lead originally appeared on Fool.com and is written by Joe Sabatucci.
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