The PHLX Semiconductor Index (SOX) has risen over 32% year to date, more than double the gain of the S&P 500. Chasing a hot sector is risky. But for those comfortable with momentum plays, ten top MoneyShow.com contributors highlight some favorite ideas among chip stocks.

 

Mike Cintolo, Cabot Top Ten Trader

MKS Instruments (MKSI) is a provider of capital equipment to the semiconductor industry, with additional exposure to the industrial, research and life sciences industries.

Management claims that every semi chip in the world has come into contact with its products, which include instruments, subsystems and process control solutions.

Shares have been strong because of the cyclical boom in the semiconductor industry and because of mounting evidence that, this time around, industry growth is more sustainable due to demand from non-consumer markets including the cloud, automobiles and artificial intelligence.

Of course, MKS has to execute as well, and on the July 25 quarterly conference call, it sounded like the company has been doing just that. Management flagged spending on DRAM, 3D NAND and Etch as three particularly bright spots. And it said the second half of the year should be stronger than the first. That’s a bullish sign given that revenue growth in Q1 and Q2 was 138% and 48%, respectively.

The market is attracted to growth, and it’s clear that big investors are thinking that 2018's modest estimates (earnings up just 9%) are too conservative. With the wind at the sector’s back, we’re game with buying a position here or on dips.

 

Jim Kelleher, Argus Research

We are initiating coverage of Lam Research (LRCX) with a Buy rating, based on growing demand for the company’s semiconductor capital equipment solutions and a healthy industry environment.

Lam provides tools for etch, deposition and other wafer manufacturing processes. Lam’s standout performance is driven by quality products, strong customer relationships and surging demand growth. The company is benefiting from particularly strong demand growth and pricing power in memory, which was the source of three-quarters of Lam’s system shipments in fiscal 4th quarter 2017.

As industry participants confront the impending end of Moore’s Law (which posited an annual doubling in transistors per square inch on an integrated circuit), semiconductor companies are seeking to improve chips’ performance through more intricate circuit design, using techniques such as vertical scaling.

Lam research products directly enable vertical scaling and other key technology advancements. Demand for flash memory is being driven in part by AI data needs. We are initiating coverage with a Buy rating and a 12-month target price of $196.

 

Bryan Perry, Cash Machine

Some stocks in the semiconductor sector have had torrid runs and trade at lofty levels that invite longer periods of consolidation to digest those big moves.

For money managers looking to stay invested in the chip space, but interested in finding deeper value, one idea is to turn to some of the legacy chipmakers and chip-equipment makers that are trading at much lower P/E ratios and, at the same time, hiking their dividends and increasing their stock repurchase plans.

One such stock that comes to mind is Texas Instruments (TXN). The company designs, manufactures and sells semiconductors to electronics designers and manufacturers worldwide. Most traders don’t think of TXN as a sexy stock. But what is compelling is that the stock is breaking out of a multi-month trading base on news that the chipmaker’s board raised the quarterly dividend by 24% and added a hefty share buyback authorization.

This is mouthwatering news to institutional investors who are seeking stocks that offer yields at or near 3% and where the company itself is sitting on the bid, buying back its own shares, which reduces the number of outstanding shares and puts a net positive impact on earnings.

Companies the size and quality of TXN that raise their dividends by 24% get global attention from the financial community. It is exactly what long-term pension money is looking for, namely, growth at a reasonable price coupled with a robust dividend and stock repurchase plan.

 

Brit Ryle, The Wealth Advisory

Cypress Semiconductor (CY) designs, develops, manufactures, markets and sells mixed-signal programmable solutions worldwide — think the tiny chips that make your cell phone and tablet so fast.

This company is crushing expectations. It has beaten or met expectations in four of the past four quarters. All three key growth vectors saw record revenue last quarter. It’s the best chipmaker on the market. It has one of the largest Internet of Things (IoT) portfolios in the industry.  And more momentum is coming soon. Cypress Semiconductor is a buy under $15. My 12-month target remains at $20.

Advanced Micro Devices (AMD) has been considered an “also ran” in the semiconductor sector; it has been second in graphics and second in CPUs for two decades. Nevertheless, the stock has piqued my interest lately. Indeed, there are two spots where the company has an opportunity. It is doing OK in the AI market, with its chips for autonomous cars.

And then there’s the data center server CPU market. Right now, Intel has that market in a stranglehold. Intel has better than 95% market share. That is crazy high and seems unlikely to last.

I'm not telling you AMD is suddenly going to ramp up five or 10 times. But I think there’s a big opportunity for AMD to do well over the next couple of years.

 

Nicholas Vardy, Alpha Algorithm Alert

Our latest recommendation revisits one of the biggest tech names from the dotcom era — Intel (INTC), one of the world's largest semiconductor chip makers.

With the rise of the FANG stocks — Facebook (FB), Apple (AAPL), Netflix (NFLX) and Google (GOOGL) —  old stalwarts like Intel lost their grip on tech investors’ imaginations over the past decade.

After years of neglect, this week marked the first time Intel appeared in a sufficient number of the strategies we monitor to become an official recommendation. In fact, eight top strategies are betting on the stock.

This is a top U.S. stock based on fundamentals measured by book value, cash flow, sales and dividends. The stock also meets the Goldman Sachs’ Active Beta strategy based on value, quality, momentum and low volatility.

Intel is also recommended based on insider sentiment and based on capital strength. The stock is a Buy based on the deep value strategy, which tracks an index of 20 stocks selected from the S&P 500.

In addition, it is one of the top 100 stocks in the universe of 1,700 stocks for which Value Line gives a #1 ranking in the Value Line Timeliness Ranking System, based on expected price performance over the following six to 12 months.

 

Charles Mizrahi, Park Avenue Investment Club

Our latest Prime Time portfolio selection is Xilinx (XLNX); we recommended buying the stock in our value-focused model portfolio at or below $70 per share.

Xilinx is one of the main players in the FPGA (field-programmable gate array) niche of the semiconductor industry. In addition to Amazon Web Services being a key customer of Xilinx, we are bullish on the growth in autonomous driving. The firm’s products are currently in 26 makes and 96 auto models.

Autonomous driving is in its infancy and we won’t even predict what innovations will be made to the automobile over the next five years.

However, the company’s market-leading position in this industry should continue to power the underlying worth of the company higher. For now, we are bullish on the long-term prospects of Xilinx.

 

Glenn Rogers, Internet Wealth Builder

Nvidia (NVDA) is well known for its powerful microchips used in PC gaming.

It is also is a leader in Artificial Intelligence (AI) and cloud-based visual computing areas and produces central processing units (CPUs) that provide the brains for mobile entertainment devices, autonomous robots, self-driving cars and drones.

The company reported record revenue of $2.23 billion for its second quarter, ending July 30. That was up 56% from $1.43 billion in the same period of 2016. Earnings per share based on GAAP standards were $0.92, up 124% from $0.41 last year.

Founder and CEO Jensen Huang said a growing number of car and robot-taxi companies are choosing Nvidia’s self-driving platform for their vehicles. And he said the company is rapidly expanding its dominance in the artificial intelligence (AI) field.

Investors are enjoying the rewards of the company’s success. For the full fiscal year, Nvidia plans to spend $1.25 billion on buybacks and dividends. I first recommended the shares in early May at $103. I continue to rate the stock a Buy with a new target of $225 per share.

 

Douglas Gerlach, Small Cap Informer

Technology experts predict there will be 70 billion connected devices operating worldwide by 2020. Skyworks Solutions (SWKS) is one of the companies that is best positioned to capitalize on any number of emerging opportunities collectively known as the Internet of Things.

Skyworks Solutions makes analog semiconductors used in mobile and connected electronic devices. Along with the iPhone, its chips are now used in the Galaxy S8. Since 1997, sales at Skyworks Solutions have grown at a consistent annualized rate of 19.7%, although growth leveled off in 2016. During the decade, EPS grew at an annualized 32% rate.

We see likely long-term EPS growth of at least 15% annually, on top of revenue growth of 13% and with some margin expansion to continue to boost the bottom line. Competition remains a threat, but the company has combated this by continuing to innovate and continuing to improve efficiency of its design and manufacturing processes.

Skyworks Solutions has no debt, and strong cash flow, with a free cash flow margin of 18%. The balance sheet includes $1.44 billion in cash. On the downside, a low P/E of 11.9 times trailing 12-month EPS suggests downside risk to $61. A high P/E of 23.2 suggests a future high price of $243 is indicated. The upside to downside ratio is 3.6 to 1. Buy up to $107.

 

Chloe Lutts Jensen, Cabot Dividend Investor

Processors are the name of the game for Intel (INTC). The company had a slow few years recently, falling behind its peers in technology adapted for the cloud and mobile devices.

The stock stagnated for most of the last three years. But that’s now changing: Intel acquired Mobileye this summer, giving the company a lead in self-driving car technology.

In September, Tesla (TSLA) announced it is switching from Nvidia to Intel processors for its infotainment systems. Also last month, the company revealed a game-changing new desktop processor. A few days later, Intel broke out to a new 10-year high.

In other words, though it still has shortcomings in a few areas, Intel has quickly become the technology leader in some of today’s fastest-growing computing markets. Analysts expect revenues to rise 3% this year and next, fueling EPS growth of 11% and 3%. Over the next five years, earnings are expected to grow by about 9% per year.

Even better, margins are rising, while the company’s payout ratio has remained in the 40% range. Plus, the stock is cheap; it trades at a P/E of 15, and a forward P/E of only 13.

 

Richard Moroney, Upside

Cirrus Logic (CRUS) shares have struggled in 2017; despite weak share-price action, Cirrus looks attractive in Quadrix from virtually every other angle.

It receives a Value rank of 95 and Overall rank of 99, two quantitative scores that that tend to work especially well for growth stocks. It also ranks among the cheapest 30% of stocks in our research universe based on both enterprise ratio and price/free-cash-flow ratio. Both ratios are more than 40% below industry medians.

Growth expectations appear modest for the remainder of 2017 and 2018, though profit estimates are rising. The stock trades at 11 times estimated 2017 profits, versus a median of 18 for the semiconductor industry. Cirrus is a Best Buy.

Investors have become accustomed to impressive earnings from Ultra Clean (UCTT), which helps chip makers reduce manufacturing costs and lower production times. Per-share profits exceeded the consensus estimate in the last four quarters, by an average of 27%. Sales have topped expectations in four straight quarters, by an average of 6%.

Strong operating momentum helps Ultra Clean earn an 85 in our custom profit rank, reflecting solid scores for earnings predictability, three-month revisions, and stock performance.

Robust spending on wafer-fabrication equipment, particularly for deposition and etching gear, should help drive earnings. Shares have rallied 177% so far in 2017, and expectations run high. But Ultra Clean seems capable of exceeding consensus estimates in coming quarters.

 

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