Beating the Market With a Chip on my Shoulder

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- It goes without saying that 2012 so far has been the year of the chips. Names such as Qualcomm ( QCOM) and Intel ( INTC) have clearly regained their pre-2001 form and are certainly looking for more.

What is not a mystery in all of this is what has been the catalyst of such resurgence -- of course, it's the growing popularity of smartphones and mobile devices. Obviously, whenever these products are mentioned, the first names that come to mind are Apple ( AAPL) and Google ( GOOG) -- with good reason. But what I have begun to realize is that when considering the names that are printed on top of the mobile devices, it has now become equally as important to consider the names that are inside those devices as well.

Speaking of "inside," this was how chip giant Intel grew to one of the largest companies in the world as it was inside virtually every PC that left the production lines -- regardless of brand. So it stands to reason that the same effect will occur for the companies that are "inside" the rise of the smart phone and devices market -- many of which combine various social networking, gaming, scheduling and other business functions that have quickly moved from "wants" to "must-haves." And analysts expect the usage of these devices to continue to explode. So the question is, why do some of these names continue to trade at a discount? It seems investors have not sought to take advantage or they're not paying enough attention.

In a recent article, I talked about how enamored I have become with Qualcomm, not only is the company an industry leader, but when you consider that its brand now controls the internal component space of approximately 250 million smartphones and other devices, it becomes clear just how just underappreciated the stock has become. For the quarter ending March 25, it reported net income of $2.23 billion or $1.28 per share on revenue of $4.94 billion -- representing an increase of 123% above the $999 million net income from the year-ago period. But the shares have recently declined due to not only supply chain problems, but also stiff competition from the likes of ARM Holdings ( ARMH) and Texas Instruments ( TXN).

In particular, ARM is one very intriguing name in chip technology. For as much as an unknown as it once was, the company has come out of nowhere to cause even Intel many sleepless nights by having taken a considerable chunk out of its market share. A lot of which has had to do with its recent partnership with Microsoft ( MSFT) and in particular the upcoming release of Windows 8. So for ARM, it is in the best position of all of the chips because not only will its technology continue to be essential in tablets and smartphone devices, but remarkably it will become equally dominant in Windows as well. Astute investors ought to be paying attention.

Another name that is not immediately known but should now be at the forefront of all chip discussions is TriQuint ( TQNT) -- a company that has long been an Apple partner, of which Apple accounts for 35% of its annual $900 million revenue. TriQuint has been a staple in various iterations of both the iPhone and the iPad. At one point the stock had gained over 50% on the year. However, since reaching as high as $7.26 on March 28, it has lost 26% of its value. At current levels, taking a position in this company may not be a bad idea if coupled with realistic expectations. But depending on how you look at it, the fact that Apple accounts for over 1/3 of its revenue may be a good or a bad situation. But it certainly deserves paying attention to.

While you're at it, you may want to also monitor what is going on at Atmel ( ATML). The attractive nature of this chip is that although it lacks the advantage of being inside Apple products, the company competes and has a sizeable advantage over its rivals in the non-mobile device market -- items which include microcontrollers, programmable logic devices, as well as a wide range of proprietary system-on-chips and non-volatile memory chips. From a fundamental perspective, the stock is a steal at current levels from the standpoint that it is trading below its book value.

Atmel is gaining share in several other products as well, especially in the gadget market with its line of maXTouch controllers. Those basically run the touch-screen interfaces on several devices from Nokia ( NOK) as well as Google. Another way to play Apple is to consider a position in a name such as Nvidia ( NVDA). But unlike the other names above, the company's management has not been able to fully address how it plans to secure more market share in the tablet and smart phone market. Be that as it may, I find its current status pretty intriguing. That said, I still intend on waiting for more clarity on its progress before I can become moderately bullish on its prospects.

Bottom line

There are several ways to play chips with many things to consider -- some presenting better advantages than others. But the underlying premise remains value and seizing an opportunity that may not be immediately apparent. There is no question that the PC decline is real and the mobile device market is on the rise. Understanding which players will be better positioned to produce market beating performances can be the difference between a thriving portfolio and one that is merely average.

As Intel taught us during the rise of the PC in the early 90's, the name on the inside can be as equally dominant as the name on the outside. Remarkably, many of the outside names of the 90's no longer exist today, while Intel is still chugging away. In other words, as the smarphone and tablet players continue to battle it out for position on the outside, the safer long term play may eventually prove to be what's inside.

At the time of publication, the author was long AAPL, INTC, MSFT and held no positions in any of the stocks mentioned, although positions may change at any time.