Last month, we did a search for value in the semiconductor space. Our analysis focused on the top 10 stocks by weighting in the iShares PHLX Semiconductor ETF (SOXX​). Given the upswing in the fortunes of this sector thanks to some strong corporate earnings results, we return to the SOXX to look at some of its smaller components. The purpose of this report will be to focus on the bottom nine stocks by weighting in SOXX. Small companies stand to gain the most if the sector sees a meaningful pick up in revenue and earnings. (See: The Best Value In the Semiconductor Space.)

Qorvo Inc. has been the best performing semiconductor stock and Microsemi Corp has been the worst.

Data Provided by YCharts

First let's start with the basics: growth rates and returns. In the table above, you can see that Microsemi Corp. (MSCC​) has been among the worst performers in 2017, down about 5%. In fact, it's the only down stock on the list. The best performing stock has been Qorvo Inc. (QRVO​), which is up nearly 29% year to date. Perhaps the most surprising name is MKS Instruments (MKSI​), up almost 13% despite reduced EPS and revenue expectations. On a longer view, it has gained nearly 88% since 2015. The worst-performing stock since 2015 is Cavium (CAVM​), up only 8.5%. Let's dive deeper into the data to find the opportunities and avoid the traps.

On Semiconductor is the cheapest semi stock when looking at forward P/E and two-year forward P/S

Data Provided by YCharts

In the table above, some valuation metrics have been added in. The table gives us a sense of how the market currently values these companies. On Semiconductor (ON) is certainly the cheapest when compared to the others on two-year forward P/E and two-year forward P/S. Meanwhile, Monolithic Power Systems (MPWR​) is the most expensive. When growth rates are factored in, things begin to change. According to the two-year forward PEG, MPWR is once again the most expensive of the bunch, because the forward P/E is nearly 22, but on growth of only 19%. Meanwhile, Cypress Semiconductor Corp. (CY) has a PEG of only 0.45, based on its P/E of 11 and growth rate of 24%. When turning to the P/S growth ratio, one can see Marvell Technology Group (MRVL​) is trading at nearly five times its sales growth which is 0.06%, while Teradyne Inc (TER), is the cheapest at 0.22 versus revenue growth of 12%. But some of these companies are up tremendously while others are not. If the multiples seem all over the place, it's because they are. We can untie this knot pretty quickly with the right tool.

MRVL and MPWR are expensive semi stocks when adjusted for earnings multiples and growth.

The chart above compares PEG ratios with the upper and lower bounds of the group PEG, providing us with a range of what lies inside and outside the normal distribution. The upper bound for the PEG ratio for one standard deviation (SD) from the average is 1.03, and the lower bound is 0.08. In this analysis, MRVL and MPWR are both above the upper bound, meaning these two stocks are expensive relative to their peers when adjusted for earnings multiples and growth. MKSI has negative expected growth, so it's out of contention. On the other hand, CY is the cheapest stocks when adjusted for earnings and growth. All of the others could be considered fairly valued compared to their peers, since they fall within in the norm.

Cypress Semiconductor Group breaks the upper bound on revenue based on this chart

Here we have a similar table, but examining the revenue side. Look how CY breaks the upper bound on revenue. Cheap on EPS and growth, but expensive on a revenue basis. Also, due to the high P/S G for MRVL, its numbers were not used to calculate the average and standard deviation. It skewed the numbers too much and was well above the upper bound, regardless. Also, MKSI was removed as well due to its negative revenue growth.

Why remove CY? It comes down a matter of opinion and personal preference. In this case, I am not a fan of companies growing EPS without revenue growth. It likely means one of two things: the company is buying shares to boost EPS, or they are cutting cost to improve margin.

MSCC is trading above the midpoint eliminating it from the list but Teradyne's growth rates are impressive

Then there were five. At this point, we can use a midpoint between the upper and lower bounds to continue to whittle down the list. MSCC is trading at above the mid-point in both cases, revenue and EPS, so it will not make the cut. Teradyne is on the cusp, but its growth rates are impressive enough to let it stay since it is split on each category.

The semiconductor stocks in this chart with the highest EPS and revenues are the best pick

The four stocks in the table above lean to the undervalued side of the equation. From here picking the stock with the highest EPS and revenue is probably the best bet. Cavium gets that crown.

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