In their research report, the Deutsche Bank analysts note that they have observed that investors have afforded large cap analog stocks a safety/early-cycle-driven valuation premium that has reached historic highs. While they admire the quality of the analog names, they expect their premium to lessen as data points more rapidly improve for digital/mixed signal stocks that currently trade at a relative discount but have positive second half of the year seasonality, co-specific product cycles and/or true cyclical leverage.
Simply stated, they feel that the valuation multiples for large-cap analog stocks, specifically Analog Devices Inc. (NASDAQ: ADI), Linear Technology Corp. (NASDAQ: LLTC), Maxim Integrated Products Inc. (NASDAQ: MXIM) and Texas Instruments Inc. (NASDAQ: TXN) have expanded well above historical averages. The analysts also point out that semiconductor investors were last positioned in a similarly “safe” manner during the depths of the Great Recession in early 2009, with that peak soon being followed by the analog premium compressing over subsequent quarters from a 55% premium to nearly a 55% discount. That translates to a big sell signal.
So what stocks are ripe for the buying in this classic sector rotation? Here is the list of the top names from Deutsche Bank:
Mega cap giant Intel Corp. (NASDAQ: INTC) leads off the list. A laggard for years, the stock really has become a value name. It sports a solid 4.20% dividend and a possible departure of the CEO. The Thomson/First Call consensus price objective for Intel is $23.
In the large cap arena, the top pick is Wall St. favorite Broadcom Corp. (NASDAQ: BRCM), with its diverse product range that focuses on voice, video, data and multimedia connectivity for home, office and mobile environments. The Wall St. price target is $40 for Broadcom.
In the mid cap area there are two names for investors to look at. Avago Technologies Ltd. (NASDAQ: AVGO) focuses on chips for the optical sector and just raised its dividend. The consensus price target for the stock is $42.
Based in the Netherlands, NXP Semiconductors N.V. (NASDAQ: NXPI) is also a mid cap favorite. The consensus price target for this mixed signal chip leader is $36.
In the small cap space, the Deutsche Bank research team has four names that investors should look at.
Fairchild Semiconductor International Inc. (NYSE: FCS) has three strong segments to power earnings. The mobile computing, power conversion and automotive divisions drive a diversified revenue stream for this small cap leader. The consensus price target is $18, which would represent a 25% move from current trading levels.
ON Semiconductor Corp. (NASDAQ: ONNN) also makes the small cap list of stocks to buy. It was upgraded yesterday to Buy from Neutral at Goldman Sachs (NYSE: GS) with a price target of $11. The consensus target is $10.
Fabless semiconductor company Monolithic Power Systems Inc. (NASDAQ: MPWR) also makes the grade. The consensus estimate for the stock is $26.
Rounding out the top semiconductor stocks to buy is Silicon Motion Technology Corp. (NASDAQ: SIMO). Based in Taiwan, this fabless semiconductor company designs, develops and supplies a portfolio of multimedia data processing, storage and transfer solutions primarily for consumer electronics. The consensus price target is $20. This could be a huge winner for investors as the price target represents a move of more than 50% from current levels.
The path is clear for the holders of analog semiconductor stocks. If the analysts are right in their rotation call, it is time to sell the analog names and rotate into better value. This is an excellent way to capture profits, but still have semiconductor stocks as a part of a diversified portfolio.
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