Technology investors used to say “When Intel sneezes, the semiconductor sector catches a cold.” While it is still true that many chip stocks still more or less follow Intel’s lead, there are now so many niche uses for integrated circuits (which is the more modern name for what used to be called semiconductors) that Intel’s value as a bellwether has become questionable. Intel’s performance is closely tied to the personal computer market while other circuit makers serve largely separate niches from cell phones to game consoles to cameras and other devices.
Nonetheless, in an otherwise very healthy market, Intel has been sneezing quite a lot recently, with its stock down about 8% since the beginning of 2012 compared to a 30% gain for the S&P 500. As a result, many of the other chip stocks have been suffering as well.
I don’t know enough about the tech sector to predict when the malaise in the chip makers will fade (and even those who claim such expertise rarely get it right). What I do know is that when the sector comes back into favor, these stocks can perform very well.
Each of the turnaround stock picks discussed below has a targeted niche (with some overlap), but they all have a few things in common: their stocks are below $10 and well off their highs of recent years; they have reasonable barriers-to-entry to their niche; and they have solid balance sheets and liquidity. I believe these characteristics give these stocks strong rebound potential.
While on the subject of chip stocks, I still like Cypress Semiconductor (CY), which I recommended last January. It jdoesn’t make this particular list because its stock is trading above 10, but I am still attracted to its growth potential and 3.7% dividend yield.
If you like these three stock picks, I recently identified seven more chip stock contrarian profit opportunities.
Atmel (ATML) is a leading producer of microcontrollers, and it is targeting touch controllers/sensors for use in mobile devices. The firm’s maXTouchproduct enables touch screen applications while its XSenseline improves screen displays. If you believe that better displays coupled with touch screens represent the wave of the future, then Atmel has appeal.
Entropic Communications’ (ENTR) products have helped transform how traditional broadcast and streaming video is securely delivered, processed and distributed into and throughout the home. It sells to most major video service providers including Comcast, DIRECTV, OCN (CHINA), UPC (Netherlands) and Verizon. Entropic has been cutting costs recently, including a planned 10% headcount reduction. The balance sheet shows cash equal to 29% of the share price, and there’s been a smattering of insider buying recently.
FormFactor (FORM) makes wafer probe cards that are used to test integrated circuit functioning. FormFactor suffered when the market moved beyond DRAM devices, one of its strengths. The company is expanding in the developing market for mobile devices via its 2012 MicroProbe acquisition. In the latest quarter, operations generated positive cash flow for the first time since the fourth quarter of 2007.
Low Priced Semis: Little Chips into Big Profits?
Company Symbol Recent Price 3-Year Range Market Cap. Mil. Current Ratio Debt to Equity
Atmel ATML 7.48 16.80-4.37 3,200 2.77 0.0
Entropic Communications ENTR 4.20 13.96-3.36 382 5.61 0.0
FormFactor FORM 6.26 11.05-3.70 342 5.14 0.0