***With the Russell 2000 trading near it's all time high, now
isn't the time to buy a small-cap index fund such as the
iShares Russell 2000 (NYSE: IWM).
Rather, now is the time to perform thorough and extensive research
to find stocks that offer attractive growth and trade at decent
valuations and have been overlooked by other investors and
I have several on my watch list that I will be sharing with you
over the next few weeks. Last week, I brought you DUSA
pharmaceuticals. Since writing the report the stock has jumped
11.4%. Today I'll tell you about another undervalued small-cap gem
that could reward investors in the years to come.
The company is South Korean semiconductor products maker
Magnachip (NYSE: MX).
***According to the
, the global semiconductor market grew ninety-six percent over the
last ten years and is expected to continue to grow at a compounded
annual growth rate of eight percent.
The Asia Pacific region has seen the most rapid growth over the
past ten years and now accounts for more than fifty percent of the
global semiconductor market, compared to less than twenty percent
for the United States.
The growth in the semiconductor industry is thanks to huge
demand from emerging market countries. In addition, semiconductor
technology is now used in a wider range of electronic devices that
we have come to enjoy in our everyday life, including nearly every
Magnachip has a broad mix of interesting technology for high
volume consumer applications such as mobile phones, flat panel
displays, notebook computers and digital cameras to name a few. Its
customers include LG (NYSE: LG), Hitachi (HICTF.PK), Samsung (KSE:
005930.KS), Nintendo (NYDOY: PK) and Nokia (NYSE: NOK) and the
tech-behemoth Apple (Nasdaq: AAPL).
After emerging from bankruptcy protection in 2009, Magnachip had
its Initial Public Offering (IPO) in March. The company exited
bankruptcy with flying colors, and now has a pristine balance sheet
with much less debt. The company is also cash rich, with $194
million in cash on its balance sheet. For a company with a market
capitalization of just $562 million, having 35 percent of the
company's value in cash is quite significant.
Last year the company increased revenues by 38 percent to $779
million in 2010. It currently sells for seven times earnings.
However, net income did decrease by $765 million in 2010 due to a
one-time reorganization charge of $805 million. But the one-time
charge is now in the rear-view mirror, and was just a necessary
evil in what is otherwise an undervalued and growing company.
In its most recent quarterly report, Mangachip reported a gross
profit of $56.5 million compared to $49.4 million for first quarter
of 2010. This is impressive because the semiconductor industry is
highly cyclical and the first quarter is typically weak. It also
raised its outlook for 2011. Magnachip expects gross profit, as a
percent of revenue, to increase from 1.5 percent to 3.0 percent
Magnachip is more than a turnaround story though. There appears
to be growth on the horizon for the company. This stems from its
deal with Apple (Nasdaq: AAPL) and most recently, Atmel (Nasdaq:
Magnachip provides the technology for Apple's iPad and Atmel's
touch screens. The iPad has been selling well in Asia and should
continue to do so going forward. Just like in the U.S., the rollout
in Asia drew hundreds of thousands of interested customers.
The iPad's continued success will have a direct impact on growing
revenues at a healthy rate.
Major investment banks, including Barclays, Citigroup and
Deutsche Bank are beginning to take notice of Magnachip's growth
potential. The average analyst estimate for the stock is $19, which
is about 30 percent higher than the recent share price.
At the end of the day, Magnachip is growing rapidly and
undervalued. Some investors may have written off the stock after
its bankruptcy, but the restructuring and strong cash position of
nearly $200 million shows that this company is in good financial
health, and should continue to benefit from increased semiconductor
use around the world.
The company continues to demonstrate revenue and margin
expansion since 2009 and has made the most of its recent
technological innovations. And the deals with Apple and Atmel
should only act as a base to further their customer relationships
while becoming a leader in innovation. For investors, this stock
could be a winner.