Investing
Watch for Breakouts From These Three Chip Stocks
Michael Comeau
03/25/08 - 06:54 AM EDT
Semiconductor stocks have taken quite a tumble since peaking in early 2007, with many stocks losing half their value or more in reaction to issues ranging from the collapse in memory prices to the general slowdown in momentum for the sector.
One of my prime responsibilities here at TheStreet.com is to run the Breakout Stocks service that assembles a model portfolio of stocks that are cheap in price now but should soar in the future.
With that in mind, now is a good time to look aggressively for semiconductor stocks that can be picked up on the cheap. Therefore, I'm going to discuss some of the semi stocks that are currently on my radar screen for the Breakout Stocks service. (Click here for a free trial to TheStreet.com Breakout Stocks service. Much of this article was sent to our subscribers yesterday. You can take a free trial and get all the alerts to The Breakout Stocks Service.)
The first name on our list is flash memory heavyweight SanDiskSNDK, which has tumbled from a high of $79.80 in January 2006 to Monday's close of $21.77. While demand for flash continues to grow significantly, pricing has deteriorated at an astounding rate. So while SanDisk's profitability hasn't evaporated in the same way it has for DRAM memory names such as MicronMU and QimondaQI, investor sentiment toward the stock is fairly negative. According to Capital IQ, just eight of the 19 analysts covering SanDisk rate it a buy, and it trades at just 12 times expected full-year earnings.
In addition, SanDisk has a strong balance sheet with nearly $1.7 billion in net cash. That accounts for about one-third of its market cap, which could serve to help limit downside in the stock. I will wait for SanDisk to trade below $20 a share before considering taking a position in the stock.
The second company is Atheros CommunicationsATHR, which specializes in wireless communication chips used in products such as notebook PCs, wireless routers, video-game devices and mobile phones. Like SanDisk, Atheros is a former highflier, once trading as high as $35.80 late last year. Since then, Atheros has sold off along with other momentum names, but investors are also concerned over potential weakness in the first quarter of this year, the results of which will likely be reported in April.
However, given the secular growth of wireless technology worldwide, as well as Atheros' potential as a takeover target for companies like BroadcomBRCM and QualcommQCOM, I believe the stock is worth looking at when it trades below $20.
Like SanDisk, Atheros is a fairly cheap stock, trading at just 17 times expected-full year earnings. In addition, it has a healthy balance sheet with $250 million in cash and investments. However, as with SanDisk, I will be patient in looking for an entry point with Atheros.
The third name is NvidiaNVDA, which specializes in making graphics chips used in PCs, video-game consoles, mobile phones and other products. Despite persistent market-share gains against chief rival Advanced Micro DevicesAMD and a string of impressive quarterly earnings reports, Nvidia has had its share price has been cut in half since last October. That's due to concerns that the PC cycle is peaking, and that Nvidia's market-share gains could end soon.