Today we jump right into stocks, starting with the good news
that last week our intermediate-term market-timing indicator
flashed a buy signal. This means all our indicators are once
again unanimously positive. There's no better time to make
money than now.
But where should you invest?
I think semiconductor chips are a great sector, and there are three
good reasons why.
First, business is improving. The vast majority of companies
in the sector--both those that design the chips and those that
manufacture them--are enjoying fast-growing sales and earnings, and
expanding profit margins. Individuals and institutions are
loosening their purse strings and buying again. Consumers are
buying cell phones, computers, televisions and cars.
Companies are buying computers, networking equipment and equipment
that enables closer tracking of inventories, productivity,
efficiency, etc. And the government is buying more of
Second, the chip sector is notorious for its cyclicality.
When times are good, companies in the industry expand, spending
more money so they can keep up with demand. But demand
eventually slows, leaving the companies with too much
overhead. So as orders slow, they cut back (often
drastically), reducing payrolls to stay profitable, some more
successfully than others. Prices fall, and eventually, demand
picks up again, margins boom, and companies scramble to keep up.
In short, companies in the chip industry tend to overreact when
they expand, and they overreact when they cut back. And they
have to, because the timing of every phase is different throughout
the decades, so there's no way of knowing how long each phase will
last as it evolves. The risk is that failure to adapt could
be more costly than adapting too vigorously. So the cycle
And then there's the stock market, which is guilty of exactly the
same overreaction. Seeing margins plummet in a contraction
phase, as we had in 2008, investors dump chip stocks like hot
potatoes. They get dirt cheap. And when the turnaround
comes, these stocks climb fast, as margins boom and projections of
future growth are ratcheted higher and higher. That's the
phase we're in now. No one knows how long it will last.
But I do know that it's a great phase for making money, provided
that you take care to exit when the trend ends.
Below are six chip stocks that look great today, presented in
All are U.S. companies, all enjoy growing sales and earnings now,
and all expect continued growth in the year ahead.
Atheros Communications (
) of Santa Clara, California, designs chips used in wireless
communications and wired networks. Ethernet, GPS, Bluetooth
and Powerline are its strengths. The company has grown
revenues every year of the past decade and it remained profitable
in every quarter of 2008 and 2009. In the latest quarter,
revenues grew 89% to $186 million, while earnings jumped 265% to
$0.62 per share. The after-tax profit margin was 22.2%.
Technically, ATHR is strong, building a little base between 37 and
Cree Inc. (
) of Durham, North Carolina, is a leading manufacturer of LEDs
(light-emitting diodes). These are the lights that will
eventually take over from incandescent and compact fluorescent
lights because they are far more energy efficient, last far longer
and don't contain mercury. The company has grown revenues
every year of the past decade but one (2007) and it maintained
profitability throughout 2008 and 2009. In the latest
quarter, revenues grew 35% to $200 million, while earnings jumped
90% to $0.38 per share. After-tax profit margin was
20.1%. Technically, CREE is very strong, consolidating its
latest climb just under 70.
NetLogic Microsystems (
) of Mountain View, California, designs chips used to accelerate
the processing and delivery of content on both wired and wireless
systems. Cisco and its contract manufacturers account for 38%
of revenues, while Juniper, Alcatel, Lucent and Motorola account
for another 30%. The company has grown revenues every year of
the past decade and it's grown earnings every year (impressive!)
since 2005. NetLogic stayed solidly profitable through 2008
and 2009, with earnings off just 24% in its weakest quarter. In the
latest quarter, revenues rocketed 125% to $69.5 million, while
earnings jumped 90% to $0.59 per share. After-tax profit
margin was 25.1%. Technically, NETL is powerful,
consolidating just above 55.
Power Integrations (
) of San Jose, California, is the leading manufacturer of
high-voltage analog chips used in energy-efficient power
conversion. It serves a wide range of end-markets, but
notably fast growing is the LED market, where Cree is
thriving. The company has grown revenues every year of the
past decade and it's grown earnings every year but one
(2008). Power Integrations stayed profitable through 2008 and
2009. In the latest quarter, revenues climbed 56% to $66.1
million, while earnings spiked 163% to $0.42 per share. The
after-tax profit margin was 18.4%. Technically, POWI is
solidly positive, building a little base between 38 and 39, but
trading volume is a little light, averaging 250,000 shares a day.
Skyworks Solutions (
) of Woburn, Massachusetts, is the largest company of these six,
with revenues on track to top $1 billion this year. It's also
the most diverse, making a variety of standard and custom chips for
automotive, broadband, cellular infrastructure, energy management,
medical and military markets. Skyworks had three years of
revenue shrinkage in the past decade, and earnings trends are also
less robust than in the companies above. In the latest
quarter, revenues grew 17% to $245 million, while earnings surged
59% to $0.27 per share. The after-tax profit margin was
19.5%. Technically, SWKS is quite healthy, trading between 15
and 16. And it's the most heavily traded of these stocks, so
it's the easiest for institutions to buy. (Even easier are
the big, well-known companies--Intel (
), Broadcom (
) and Texas Instruments (
)--but their stocks are so well-known and over-owned that they
can't go up like these six can.)
Last but not least is Volterra Semiconductor (
) of Fremont, California, whose chips transform, regulate, deliver
and monitor the power consumed by other chips. Big customers
are Alcatel-Lucent, AMD, Cisco, Dell, HP, IBM, Juniper, Lenovo and
Sony. The company has grown revenues every year of the past decade
but earnings trends have been less reliable. In the latest quarter,
revenues grew 56% to $34.2 million, while earnings mushroomed 278%
to $0.34 per share. The after-tax profit margin was
24.7%. Technically, the chart is strong, with a short base at
24, but volume is light, averaging 340,000 shares per day,
Of the six, my favorites are Atheros, Cree and NetLogic, because of
a combination of fundamental and technical factors.
But I know that less experienced investors will be attracted to
Skyworks and Volterra, because their stocks are lower-priced.
Trouble is, those lower prices bring greater risk. Whatever
you choose, be sure you manage risk appropriately, by buying on
dips, and by keeping losses small.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory