Yahoo Finance 4 Superstar Semiconductor Stocks Set to Soar
In the past 12 months, the information technology sector has been one of the highest-flying components of the U.S. market. The semiconductor industry has been part of this growth, with the Philadelphia Semiconductor Index up 8.6 percent in the first half of the year.
However, concerns about a slowdown in the Chinese economy and earnings warnings by a few companies in the space forced the shares of many semiconductor firms lower in June and early July.
Consolidation is also hitting the industry as companies look for ways to boost their growth. In late June, it was announced that Intel (INTC) would buy Altera (ALTR), a maker of field-programmable gate arrays, for $16.7 billion. In March, NXP Semiconductors (NXPI) announced that it was merging with Freescale Semiconductor (FSL) in a deal valued at more than $40 billion.
Other acquisitions and mergers are likely in the future as larger players look for ways to continue their earnings growth trajectories.
The screen. We used Recognia Strategy Builder to search for U.S.-traded semiconductor stocks with reasonable valuations and strong prospects for future growth. We began by setting a minimum market cap threshold of $10 billion to limit ourselves to the larger, more stable portion of the semiconductor market.
Next, we looked for stocks with strong prospects for growth based on their projected earnings per share growth rate. We selected only stocks with projected EPS growth this year of 10 percent or more. In addition, to zero in on companies with efficient operations, we selected only companies with return on equity of 10 percent or more. Return on equity is a measure of how efficiently a company's management has employed capital to generate income.
Finally, to ensure we don't overpay for our investments, we screened for companies with reasonable forward price-to-earnings ratios of 30 or less. Forward P/E ratio is a measure of the relative value of the stock price when compared to the analysts' estimate of this coming year's earnings. Here are the results:
Intel is the largest company on our list with a market cap of $140 billion. It has strong return on equity of 20.8 percent and a very reasonable forward P/E ratio of 12.7. Though Intel has been stung by the move from traditional PCs to tablets and mobile devices, it still has a very strong business and is expected to grow earnings by more than 12 percent this year.
NXP Semiconductors NV of the Netherlands has the highest return on equity on our list at 58.6 percent. As noted above, in March NXP announced a merger with Freescale Semiconductors of Austin, Texas. The combined entity will be among the largest semiconductor firms worldwide with combined annual revenue of more than $9 billion.
Micron Technology (MU) is a leading manufacturer of semiconductor memory including DRAM, flash memory and solid state drives. In the last month, the stock price has dropped by more than 25 percent after reporting disappointing earnings in late June. As a result, Micron is now valued extremely well with a forward P/E ratio of just 4.8. Such a low valuation is attractive to a potential acquirer -- so it was no surprise that China-owned chip maker Tsinghua Unigroup made a $23 billion offer for Micron this week.
Linear Technology (LLTC) is the smallest company on our list with a market capitalization of just $10.2 billion. Linear manufactures a variety of analog integrated circuits for the telecommunications, networking and computing sectors. In mid-April, the company announced fiscal third-quarter results that were largely positive but the stock declined on negative earnings results by larger firms such as Texas Instruments (TXN). With strong growth prospects and a reasonable forward P/E ratio of 20.2, Linear is poised for stock price appreciation.
Historical Performance: Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked over a five-year historical period. Using a three-month buy-and-hold strategy, the screen described had a 16.5 percent annualized return compared to 11.7 percent for the Dow Jones industrial average and 14. percent for the Standard & Poor's 500 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton of Recognia is a blogger for The Smarter Investor. You can follow him and Recognia on Twitter at @Recognia_Peter and @Recognia.
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