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Eight semiconductor stocks to charge up your portfolio

Larry D. Spears, Money Morning
0 Comments| May 18, 2010

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I moved from the Midwest to Sunnyvale, California in 1974 - just about the time that city earned the moniker "Capital of Silicon Valley."

It got that name from the material that's primarily used to make semiconductors - even though few people at the time knew exactly what a semiconductor was. By contrast, today's world literally runs on semiconductors.

Virtually every device that plugs in or operates on a battery has its functions controlled or executed by semiconductors of one type or another - chips, transistors, diodes, digital circuits, solar cells, etc. And, because of poor economic conditions in recent years that have curtailed corporate spending, many of those semiconductors are either wearing out or technologically out of date.

That fact, coupled with the mushrooming personal demand for all things "tech," has sparked a new wave of sales and profit growth in the semiconductor sector.

From 2006 through mid-2009, the semiconductor industry was mired in its worst recession since it first became an industry. In 2009 alone, battered by the same market collapse and fiscal uncertainty that befell nearly every other industry, worldwide semiconductor sales plunged 9.6%.

This year, however, things have begun looking up.

Gartner, Inc., one of the leading research companies in the information technology (IT) field, now projects that semiconductor sales could rebound by as much as 19.9% in 2010, based on three major factors:

  • Companies that have been treading water technologically during the recession must now begin spending money first to catch up, and then to ignite future growth. Technology firms will be among the first to benefit from this renewed spending, simply because their products help buyers operate more efficiently and grow more quickly.
  • The majority of American businesses are operating with computers that are now four or five years old, the age at which they typically become cheaper to replace than repair.
  • Modern managers now fully recognize the importance of IT spending in keeping their companies abreast of the competition.

Early 2010 sales and earnings results seem to support Gartner's projections. The Semiconductor Industry Association (SIA), the sector's leading U.S. trade group, reported that worldwide semiconductor sales totaled $22.3 billion in January and $22.0 billion in February. Sales reached $23.1 billion in March, which was a 58.3% jump from March 2009, when sales were just $14.6 billion. First-quarter sales totaled $69.2 billion, compared to just $43.7 billion in the same period last year.

The latest financial results for some of the industry's leading companies also reflect the upturn:

  • Intel Corp. (NASDAQ: INTC, Stock Forum) reported in April that its 2009 sales had risen to $10.59 billion, the largest total in the company's history. Gross profit for the quarter ended December 2009 was $6.84 billion, up from the prior quarter's $5.4 billion, and net income climbed to $2.82 billion, up from $1.856 billion in the third quarter and a loss of $398.0 million in the second quarter of 2009.
  • Texas Instruments Inc. (NYSE: TXN, Stock Forum) reported first-quarter 2010 numbers a week later. Sales climbed to $3.205 billion, up from $3.005 billion at year-end 2009 and significantly higher than last year's second-quarter low of $2.456 billion. Gross profit rose from $1.176 billion a year ago to $1.689 billion in 2010, while net income climbed to $658 million versus a low of $260 million in second-quarter 2009.
  • LSI Corp. (NYSE: LSI, Stock Forum) reported first-quarter 2010 revenues of $637 million, a 32% increase from 2009's $482 million. The company posted a $23 million quarterly net profit, up from a net loss of $104 million in the first quarter of 2009, and raised both second-quarter and full-year 2010 projections from prior estimates.

Both the improved performance and the enhanced outlook for the sector were noted in a recent Forbes article, which said, "electronics productivity lies at the heart of the resumed global growth."

"Where capital poured into natural resources to create new capacity and channel supplies to new geographies from late 2002 through 2007," Forbes reported, "this cycle is seeing a revitalized Internet and chip-based growth. The tech world is emerging into its greatest upturn ever."

Forbes went on to describe the surge in the industry's fortunes as inevitable, because "companies must reckon with lost market share if they don't spend for growth now."

The importance of the semiconductor industry in fueling renewed growth in nearly all other sectors - as well as the almost endless range of uses for the latest semiconductor products - was echoed in a mid-April analysis by Zacks Investment Research.

"The Semiconductor Industry serves as a driver, enabler and indicator of technological progress," said Zacks. "Developments in the industry determine the way we work, transport ourselves, communicate, entertain ourselves and respond to our environment. The PCs we work on, the cars we drive, the phones we communicate with, the electronic gadgets on which we watch movies, listen to music and play games on, and the planes and weapons used to transport or protect us use semiconductor devices."

To put a dollar value on just two elements in that description, the Consumer Electronics Association (CEA) estimates smartphones alone will generate $17 billion in 2010 sales (52 million units), while notebook computers will produce $14 billion in sales (30 million units).

Who back in the early '70s would have thought that the semiconductor would become an integral component in nearly every aspect of our lives?

Not many people, for sure. But it has - and that means it should also play a significant role in your investment portfolio. So, how can you make that happen?

Essentially, you have two options - either invest directly in stocks of companies in the semiconductor field, or put your faith in the managers of one of the six or seven exchange-traded funds (ETFs) that focus exclusively on the chip sector. To help you get started, here are some top choices to consider from each group:

Semiconductor stocks

Intel Corp. (NASDAQ: INTC, Stock Forum), recent price $21.24 - The biggest isn't always the best, but Intel is the dominant name in the semiconductor industry. It's also No. 1 in sales ahead of Samsung Electronics Co. and Toshiba Corp. (both of which trade only thinly on the U.S. markets as depositary receipts), so it makes sense to consider having "Intel Inside" your portfolio. The latest earnings were detailed above, and the trailing earnings per share (EPS) are $1.09. The stock pulled back in last week's market-wide selloff and now stands slightly above the middle of its $15.00-$24.37 range for the past 52 weeks. Intel pays a 63-cent dividend, good for a 2.8% current yield.

Linear Technology Corp. (NASDAQ: LLTC, Stock Forum), recent price $28.23 - Although not among the top 10 in total semiconductor sales, LLTC has turned in an impressive performance in recent months. The company reported record revenues of $311.3 million for its quarter ended March 28, up 21% from the prior quarter and 55% from the year-ago period. Net income was $100.6 million, up 33% from the prior quarter and 104% from a year ago. LLTC, with trailing EPS of $1.26, also increased estimates for the remainder of the year. The 52-week price range is $20.26-$31.84, and LLTC pays a 92-cent dividend, representing a yield of 3.1%.

Analog Devices Inc. (NYSE: ADI, Stock Forum), recent price $27.74 - ADI had $603 million in revenue in the first quarter of fiscal 2010 (second quarter results will be reported May 18), up from $476.6 million a year ago. Earnings per share for the quarter were 41 cents, bringing the total for the past year to $1.16. The 52-week trading range has been $19.14 to $32.19, and the 80-cent dividend represents a yield of 2.8%.

STMicroelectronics ADR (NYSE: STM, Stock Forum), recent price $8.12 - STM is a good choice for those looking for a lower-priced entry into the sector. Based in Geneva, Switzerland, the company ranks No. 5 in global semiconductor sales, with $9.2 billion in revenues over the past year. However, accounting charges resulted in a net loss of $532 million, or 61 cents per share, though the company expects to report a profit for its full fiscal 2010 year. The company also has a book value per share of $7.86, nearly matching its current price. The 52-week range is $6.00 to $10.73, and the 28-cent dividend represents a yield of 2.8%.

Advanced Micro Devices Inc. (NYSE: AMD, Stock Forum), recent price $8.38 - One of the oldest names in the industry, AMD ranks No. 9 in total semiconductor sales and is a major competitor with Intel in microprocessor chips for computers. The company had $980 million in earnings on $5.8 billion in sales over the past year. Earnings-per-share estimate for the next quarter is six cents, with 49 cents forecast for all of 2010. The current price/earnings (P/E) ratio of 7.2 is well below industry averages. The 52-week trading range has been $3.22 to $10.24. AMD does not pay a dividend.

Semiconductor ETFs

PowerShares Dynamic Semiconductors (NYSE: PSI, Stock Forum), recent price $13.04 - This fund has a 52-week price range of $9.52 to $15.27, and generated a 45% return over the past year. Founded in June of 2005, the fund's largest holdings include Intel, Texas Instruments, Micron Technology Inc. (NASDAQ: MU, Stock Forum) and Broadcom Corp. (NASDAQ: BRCM, Stock Forum).

Ultra Semiconductors ProShares (NYSE: USD, Stock Forum), recent price $31.18 - This fund, founded in January 2007, has a record of volatility, as evidenced by its trading range of $15.35 to $41.27. However, for those who've timed it right, the fund provided market return of 72.49%. Intel makes up nearly one-quarter of the fund's holdings, followed by Texas Instruments and Applied Materials Inc. (NASDAQ: AMAT, Stock Forum). If you decide to buy this one, use a limit order as the bid/ask spreads tend to be wide and highly variable.

iShares S&P North American Technology-Semiconductor Index (NYSE: IGW, Stock Forum), recent price $46.62 - This fund, which dates back to 2001, seeks to track the S&P Semiconductor Index and, as such, has proportionate holdings in Intel, TXN, Applied Materials, Broadcom, and 48 other U.S.-traded semiconductor companies. The 52-week price range has stretched from just $14.03 to $54.00, reflecting the sector's recovery from March 2009 lows. The one-year market return is 54%

Whether you choose individual stocks or ETFs, be aware that the semiconductor sector is among the most volatile in the U.S. markets. That gives it the potential to be highly rewarding, but it's hardly an ideal place for those who lie awake nights worrying about every little up and down in daily prices.

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