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Trifecta Stocks

Trifecta Stocks

Opening a New Tech Position

By Bryan Ashenberg and Bob Lang | 02/26/15 - 10:00 AM EST
Actions Taken:
Symbol Action # Shares Traded Recent Price Shares Owned After Trade % of Portfolio After Trade
LLTC 234 $48.3 234 3.00%

We are going to initiate a 234 share position, or 3% portfolio weight, in Linear Technology Corporation (LLTC:Nasdaq) in the Trifecta Stocks portfolio.

The was recently trading at $48.30. We look to this name as a consistent performer with a nice dividend yield that should be a solid, though not stellar, performer.

Linear designs, manufactures and markets high-performance analog integrated circuits. Analog chip manufactures have designers with years of experience, which serves as a large competitive barrier since the multitude of chip designers focus on digital chips. The company sells into a diversified customer base, with sales into the industrials end markets representing 43% of revenue, automotive 19%, communications 20%, computers 9%, consumer 3%, military and space 6%. The company is seeing strength in the industrials and automotive sectors and we favor the stock for that exact reason.

Linear has gained market share in the industrials and automotive space over the past three calendar years. We have long stated our belief that the connected car theme is just in its infancy and see Linear as another way to capitalize on this trend. Analog chips are increasingly used in electric and hybrid vehicles (including battery monitoring) and in navigation and infotainment systems, among other automotive applications.

Customers in those arenas are willing to pay for quality and not evaluate suppliers simply on price. Linear provides high- performance chips with low failure rates at nearly one part per million, so that an automobile manufacturer does not have to worry about a minor price difference per car and can instead focus on its bigger issues. The industrials and automotive markets have longer sales cycles, longer life designs and higher profitability. International sales represent about 73% of revenue, with the U.S representing around 27% and Europe 19%.

Analog chips can help monitor real-world conditions, providing sensors for temperature, pressure, weight, light, sound and speed and offer power management solutions. Linear’s average selling price is $1.88. The company’s leading gross margin (75.4% last quarter) and operating margin (44.9%) are indicative of the company’s strength (relative to its peer average in the mid-60% range for gross margin and low-30% range for operating margin.

Some bears knock the company, as it’s a modest grower. Management deliberately avoids low-margin businesses (consumer and mobile technologies). The flip side to avoiding the business is that the company has lower growth rates, as it is not designed into some of the fastest-selling consumers groups.

The company has a robust balance sheet, having cleaned up its debt, and now has $1.07 billion in cash, or $4.39 per share. About 80% of the cash lies overseas and we believe management could leverage the balance sheet and launch an accelerated buyback plan. The company throws off ample cash flow ($148 million last quarter) and the stock currently sports a 2.475% dividend yield.

Management issued its March (fiscal third) quarter outlook calling for 4-7% sequential growth, slightly better than typical seasonality of 4% and ahead of expectations. We believe the stock is worth $54 a share, using a 23x multiple (a premium to its group multiple of about 18x due to the company’s high margin profile and strong cash position) on fiscal 2016 consensus earnings (June) of $2.32 a share.

Technical Analysis

Click here for a larger chart.

Linear Technology is one of those under-the-radar semiconductor companies, not getting the same buzz as Intel (INTC:Nasdaq), Texas Instruments (TXN:NYSE), Samsung or Applied Materials (AMAT:Nasdaq). But it is one of the best- performing names in the group and technically looks ready to stay on a roll.

We see from the chart the defined channel, where it is near the high end of the range, but we also see a nice cup-and- handle continuation pattern and a move above $49 confirms the move. Volume had been decent on the way up, but now it is consolidating on lower turnover, which is what you like to see at this moment.

The momentum indicators are all on buy signals and while we would start a position here, we could add more at the bottom end of the channel.

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