9 Semi Stock Takeover Targets With Upside

BALTIMORE (Stockpickr) -- Texas Instruments (TXN) is finding some deep value in the semiconductor complex, and it's willing to pay pretty penny.

After the market closed on Monday, the global designer and maker of semiconductors announced that it's buying National Semiconductor ( NSM) for $6.5 billion, which equates to a fat 78% premium over National's closing share price of $14.07 before the deal hit the wires. National Semiconductor is known for developing analog-intensive products that provide greater energy efficiency, better audio and sharper images in electronic systems.

Texas Instruments said it plans to finance the deal by borrowing $3 billion to $4 billion and paying the rest in cash. The acquisition will now make Texas Instruments the world's third-largest semiconductor maker behind Intel ( INTC) and Samsung Electronics.

Anyone who's bullish on the market in general right now must love this news. Technicians had been taking issue with the semiconductor sector after its lack of participation in the rally, but this merger should change that view -- especially if it sparks a rally with legs.

Related: 6 Precious Metals Stocks Set to Explode

I would look for a breakout in the Semiconductor Holders ( SMH) above overhead resistance at $37 a share for confirmation that a possible new bull market in the space is setting up.

Something else to consider is that if you're short any of the beaten-down semiconductor stocks, then you're going to be thinking twice about betting against these names. Nobody who's short a stock wants to wake up in the morning and have to worry if one of his positions could go up 70% against him. This merger could easily embolden the bulls to start a buying spree in the semi space -- and scare the short-sellers out of their bearish bets.

What this also means is that the semi complex could be ripe for more acquisitions since many of the stocks are already trading far below previous levels. Whenever I see something like this unfold, the first thing I do is make a list of the most attractive names and some of the most heavily shorted names. Basically, this offers two ways to win: either by reaping the rewards of a massive short squeeze or from value players stepping in to support depressed stock prices.

The growth guys will follow the value guys, and if all goes well, some names will be acquired and others will just be great trades that squeeze the shorts into the stratosphere.

With this in mind, let's take a look at some semi stocks that could be excellent takeover and short squeeze candidates.

Marvell Technology

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National Semi is a big analog chip player, so it only makes sense to find other analog chip makers that look attractive. One name is Marvell Technology Group ( MRVL), which designs, develops and markets analog, mixed-signal, and digital signal processing and embedded microprocessor integrated circuits. Marvell ships over a billion chips a year. The company specializes in chips for platforms such as high-volume storage solutions, mobile and wireless, networking, consumer and green products.

This stock has been beaten down notably since the start of the 2011, with shares off from $22 to its current price of around $16. Marvell's current market cap is $10 billion, and its enterprise value is $6.9 billion. What's great about speculating on Marvell as a takeover play is that the company's large hoard of cash will make it more attractive than some other names. Marvell has around $2.9 billion in cash on its balance sheet and very little long-term debt.

This stock isn't heavily shorted when you consider that the current short interest as a percentage of the float is only 2.4% as of March 15. But the bears have been increasing their best from the last reporting by a whopping 39.4%, or by around 3.6 million shares.

As of the most-recently-reported period, Marvell was one of the top holdings of Lee Ainslie's Maverick Capital, comprising 3.8% of the total portfolio.

Intersil

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Staying with the theme of analog players, investors should take a hard look at Intersil ( ISIL), which engages in the design, manufacture, and marketing of analog integrated circuits. The company's product portfolio addresses some of the applications in four end markets: high-end consumer, industrial, communications and computing. Intersil focuses on three of the fastest growing markets -- flat panel displays, optical storage (for CD and DVD recordable products) and power management.

Intersil has a current market cap of $1.65 billion and an enterprise value of $1.43 billion, so the company is small enough for a big player to come in and buy them out. A Needham analyst just labeled the stock a "smaller-cap version of where National Semi was before yesterday."

Related: 9 Semiconductor Stocks With Upside

Intersil has a decent amount of bearish bets made against the stock. The current short interest as a percentage of the float is 7.7% as of March 15. I would advise market players to watch for a breakout above $15.85 to $16.34 a share for confirmation of much higher prices and short covering. Look to add this name on a pullback since it already zoomed up 8.4% on Tuesday.

Monolithic Power Systems

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Another analog player is Monolithic Power Systems ( MPWR), which designs, develops and markets analog and mixed-signal semiconductors.

This company looks extremely attractive as a takeover target for two reasons: Its market cap is only $511.36 million, and the company is sitting on $177.72 million in cash on its balance sheet with no long-term debt. Share of Monolithic aren't expensive either, trading at trailing price-to-earnings of 18.56 and a forward price-to-earnings of 14.34.

This stock has been in a nasty downtrend since last May when shares high a 52-week high of $25.34. Since then, the stock has been making lower highs and lower lows as it traded all the way down to a recent low of $13 a share. However, the stock jumped 6.2% on Tuesday on volume that was almost twice the three-month average activity of around 450,000 shares. If these strong volume patterns continue, the stock could be heading towards its next significant overhead resistance levels at $15.60 to $16.60 a share.

The current short interest as a percentage of the float for Monolithic is only about 4.2% as of March 15. That's not a huge short interest, but it's enough to boost the stock on any future short-covering since the tradable float is so small, at only 31 million shares.

Micrel

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Yet another analog stock play is Micrel ( MCRL), which designs, develops, manufactures and markets a range of high-performance analog power integrated circuits, mixed-signal and digital ICs. Mircel's products cover a range of end markets such as cellular handsets, portable computing, enterprise and home networking, wide area and metropolitan area networks, digital TVs and industrial equipment.

This is another low-market-cap company and cash-rich analog play. Micrel has a current market cap of $882.66 million and an enterprise value of $716.50 million. The company has $109.24 million in cash on its balance sheet with only $2.86 million in debt. The stock isn't expensive, trading at a trailing price-to-earnings of 17.59 and a forward price-to-earnings of 14.69.

Related: Top-Rated Semiconductor Stocks

The current short interest as a percentage of the float for Mircel is 5.9%. Again, not a huge short position, but big enough to move the stock since tradable float is small at around 50 million shares.

From a technical standpoint, Mircel is one of the stronger-looking semi stocks, with shares only 70 cents away from breaking out above some past overhead resistance at around $15 a share. If the stock takes that level, then I would prepare for a lot of short-covering and the potential for significantly higher prices.

More Heavily Shorted Semi Stocks

If you want to simply play the heavily shorted semi stocks for any future rallies, then I have three candidates that you must put on your trading radar: Cavium Networks ( CAVM), Entropic Communications ( ENTR) and NetLogic Microsystems ( NETL) The short interest as a percentage of the float for both CAVM and NETL is 16%, and for Entropic Communications it's a whopping 36%.

If the semi sector does go major rally mode, then I expect all of these three to produce sizable gains as bears start to cover some of their bets. Again, nothing is more trouble to a short-seller than being short a sector that's cheap and ripe for takeover activity. There will be hedge funds alone who gun at this sector just for that sole purpose.

Nvidia

Two more chip players that could be attractive takeover targets are Nvidia ( NVDA), Advanced Micro Devices (AMD). These two don't fall into the analog department, but they both are huge revenue-generators and big players in their respective markets.

Nvidia, a provider of visual computing technologies and the inventor of the graphic processing unit, is especially attractive because the company is sitting on a pile of $2.49 billion in cash with only $23 million in debt. Shares of Nvidia have been beaten down in the last couple of months, falling from $26 to its current price of $17.58 a share.

The trade here with Nvidia is simple: buy the stock now and use a mental stop at just below $17 a share. I am picking $17 because the stock has a ton of support at that level.

Nvidia shows up on recent lists of the 10 Best-Performing Nasdaq Stocks of 2011 and 40 Stocks Analysts Are Insanely Bullish About.

Advanced Micro Devices

Advanced Micro Devices, global semiconductor company, is a cheap stock trading at a trailing price-to-earnings of 12.67 and a forward price-to-earnings of 10.96. Any company that wants to compete with Intel could easily come in here and make a bid for AMD and instantly capture a nice chunk of market share. In fact, I personally believe the only way AMD survives going forward is by getting bought out.

The stock is also heavily shorted with the current short interest as a percentage of the float at 11%. AMD has a ton of previous support at around $8 to $7.90 a share, so I would get long now and use that as a mental stop.

The bottom line: Let any of these names that have spiked already cool off a bit before jumping in. Any that haven't spiked yet could be offering up great buying entry points.

I like the chances of all of these names trending higher in the next six to 12 months. Plus, some could experience big short squeezes. I am offering these stocks up as trading ideas, so cut losses quick if they don't start moving, and let the winners run if they do.

To see more potential semiconductor takeover plays, including Fairchild Semiconductor ( FCS), ON Semiconductor ( ONNN) and Semtech ( SMTC), check out the Semiconductor Takeover Stocks portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.

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