Massachusetts Institute of Technology
. Peck has been the senior semiconductor analyst at
since 1993. Before that, he spent six years at
Donaldson Lufkin & Jenrette
. He began his Wall Street career at
in 1985. Between 1978 and 1984, he worked on the laboratory research staff at MIT.
Industry Outlook and Style
"What we're seeing is the manifestation of a trend that has been building for more than a year -- namely, the massive shift in the semiconductor industry away from PC dependency, where the growth rate is obviously slowing, toward a much more diverse market involving new communications and consumer electronics products," Peck says.
"The problem for investors is that 40% of semiconductor components are still sold for use in personal computers. That means it's impossible for the group to avoid the cloud hanging over the PC business," he continues. "It's really a psychological issue: If investors see the PC market looks weak, they dismiss semiconductor components altogether."
Peck thinks one can turn some lemon stocks into lemonade, however. "It's now possible to sift through the carnage of the fourth quarter of 2000 and pick up those names whose valuations have come down dramatically and that offer interesting opportunities. There aren't many such names -- only a handful," he asserts.
Not surprisingly, the stocks he likes have limited exposure to the PC business. His big-cap favorites are
The collection of small-caps Peck likes includes
Applied Micro Circuits
. "They are underestimated and, on a relative basis, undervalued, having fallen between 50% and 80% off their summer 2000 highs, and all of them serve the communications and consumer electronics markets almost exclusively," he explains. (SG Cowen is a current or recent banker for all five.)
Peck believes the time to buy these potential outperformers is now. As he puts it, "The significant, broad-based inventory correction we're seeing in semiconductor components will moderate in the next few months, reaching a level that feels comfortable to both suppliers and customers. At that point, orders will recover and we may even see the beginning of inventory replenishment. We should see
much-improved visibility, particularly for the companies I mention, as we enter the second half of 2001."
What attracts Peck to Analog Devices and TI is that they each offer the two technologies vital to next-generation consumer electronics and communications systems -- analog components and digital signal processing (DSP). These technologies work in tandem as the core for everything from MP3 players to antilock brakes. "Some companies have just one of these technologies. Having both puts Analog and TI in a formidable position," the Cowen analyst notes.
Peck believes that Analog Devices could earn $2.10 a share in 2001, considerably above his $1.54 estimates for 2000. The stock is selling at only 25 times his estimate, whereas the industry on average sells at 30 times earnings, and comparable companies in the analog business -- which do not have DSP, incidentally -- typically have a multiple of 35 or 40, he says.
"So Analog Devices has not only the highest growth rate of the big companies, but also one of the lower multiples," observes Peck. He is betting that its new cell-phone product, Othello, will win major business for the company in that market for the first time ever.
Texas Instruments has been a leader in the sale of DSPs and analog components for cellular handsets. This market, too, suffered a significant slowdown last year, which beat down TI's stock. But unlike the PC business, the cell-phone business is rebounding, contends Peck. He expects cell-phone sales to be back on track by mid-2001.
"At the peak, probably 24% of TI's sales were cell-phone related, but that number fell back to the midteens as a percentage of sales in the last two quarters of 2000, and now it's coming back," says the Cowen analyst. As a result, earnings will rise sequentially from quarter to quarter this year, and will accelerate in the second half. This offers a chance for the stock, which has been hovering between $35 and $50 since last October, to break out, says Peck, who does not set price targets.
The analyst urges investors to buy a basket of the small-cap stocks listed above. As a group, he predicts they "could outperform the industry average by 40% to 50% in the coming year."
Favorite stock for next 12 months:
"ADI is my favorite stock in the short term. I believe it will benefit most from incremental revenues engendered by the sale of brand-new products, especially the Othello cellular receiver. I expect ADI to outperform the semiconductor group average by a good margin. ADI's price is now in the low $50s. Last year its high was $100 and its low was $45. So as you can see, it's still on the low end of the recent one-year trading range. We're saying it could recover a fair amount in a benign economic environment."
Rate Their Stock Picks:
Which stock do you like best?
Niles: RF Micro Devices
Glavin: Applied Micro Circuits
Peck: Analog Devices