We recently compiled a list of the 12 Best Small Cap Tech Stocks to Buy. In this article, we are going to take a look at where Silicon Motion Technology Corp. (NASDAQ:SIMO) stands against the best small-cap tech stocks to buy.
US Inflation and the Anticipated Fed Cuts
Inflation in the US may have reached a 3-year low of 2.6% in August, the lowest rate since March 2021, according to a survey of economists by FactSet. Core inflation, excluding food and energy prices, is believed to have remained at 3.2%.
Inflation peaked at a 4-decade high of 9.1% in June 2022 as the economy rebounded rapidly from the pandemic recession. The Fed responded with 11 rate hikes in 2022 and 2023, raising its key rate to a 23-year high and significantly increasing borrowing costs across the economy. The easing of inflation may pave the way for the Fed to start cutting interest rates next week.
AP News reported that Fed officials think that inflation is steadily declining towards their 2% target. Reducing the Fed’s benchmark rate is expected to lower borrowing costs for consumers and businesses. Christopher Waller, a key Fed policymaker, noted that over half of tracked goods and services have seen annual inflation drop below 2.5%.
Craig Johnson, Chief Market Technician at Piper Sandler & Co., and Gene Goldman, Cetera’s CIO, recently came together to discuss the Fed’s interest rate cuts, and stock sector performance.
Gene Goldman expressed that his base case anticipates 3 rate cuts of 25 basis points each, beginning in September. His belief lies in the slowing inflation, a deceleration in economic growth, and the overall resilience of the economy, which he thinks is not as dire as some reports suggest. Goldman noted that while the labor market showed mixed signals, with both positive and negative data, the market’s expectations for deeper rate cuts may be exaggerated. Goldman acknowledged that political uncertainties could also contribute to market fluctuations.
Craig Johnson was also of the opinion that a 25 basis point cut is already anticipated by the market, suggesting that a 50 basis point cut could raise concerns among investors. He believes that a series of 25 basis point cuts would align with their perspective. Craig emphasized the importance of staying calm considering that, historically, October has been a strong month for the markets, with gains observed 86% of the time since 1929.
Johnson acknowledged that while there has been a recent pullback, particularly following the worst week for the markets since March 2023, there has been a rebound with the Nasdaq and S&P showing positive movements. He highlighted the necessity of dissecting the performance of the MAG 7 tech stocks, which he believes are now lagging. Instead, he pointed out that there are promising stocks within the $2 to $10 billion range that demonstrate solid growth potential, both at the top and bottom lines, and appear constructive on the charts.
He noted the Nasdaq’s 0.75% rebound but referred to it as a dead cat bounce, indicating that a more substantial recovery of 8-10% could be on the horizon. He attributed the day’s positive market sentiment to an employment report that exceeded expectations.
Methodology
We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We sorted our screen by market cap and looked through the top 25 stocks that matched our criteria. We then selected 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Silicon Motion Technology Corp. (NASDAQ:SIMO)
Market Capitalization as of September 11: $1.92 billion
Number of Hedge Fund Holders: 43
Silicon Motion Technology Corp. (NASDAQ:SIMO) is an American-Taiwanese company involved in developing NAND flash controller integrated circuits for solid-state storage devices. It makes chips that help other companies make better flash memory devices, and are used in things like smartphones, tablets, computers, and USB drives, making these devices faster, and more reliable.
The company also provides InstantView docking technology, which allows its users to mirror the screen of any laptop, Chromebook, or Android phone without downloading the driver.
This quarter, the revenue from NAND flash maker grew nearly 15% sequentially, accounting for more than 60% of the total revenue, which was $210.67 million. This revenue for Q2 this year was 50.09% higher than Q2 in 2023. The growth is attributed to strong demand from PC and smartphone device makers as original equipment manufacturers (OEMs).
NAND pricing is increasing and expected to move higher throughout the remainder of the year and early 2025, driven by demand from data center and enterprise storage applications. Management says the company has unmatched technical and financial resources to build next-generation controllers. Such claims build investor trust. As of June 30, 43 hedge funds are long in the company, with the highest stake valued at $67,975,717 by Pertento Partners, of a total of 839,310 shares.
Silicon Motion Technology Corp.’s (NASDAQ:SIMO) varied range of products and leadership in technology is projected to give a 25-30% increase in revenue each year. With the core business growing at an impressive rate, and the growing integration of electronics and semiconductors throughout networking communication devices, the company appears to be well-positioned to benefit.
Ave Maria Growth Fund stated the following regarding Silicon Motion Technology Corporation (NASDAQ:SIMO) in its first quarter 2024 investor letter:
“Silicon Motion Technology Corporation (NASDAQ:SIMO) is a fabless semiconductor company that specializes in low-end flash memory controllers. Memory manufacturers often design their own controllers in-house, but the rising cost of developing a chip is making it increasingly beneficial to outsource the more commoditized low-end controller development to a third party like Silicon Motion. This outsourcing trend is set to move from consumer applications into the server end market, and Silicon Motion’s new enterprise controller is well positioned to capitalize on the growth.”
Overall SIMO ranks 9th on our list of the best small-cap tech stocks to buy. While we acknowledge the potential of SIMO as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the stocks on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
