Mad Dash to Nasdaq: Siliconix Spike Isn't So Silly

When demand rises, even dull components become hot commodities, driving stock price of chipmakers.
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SAN FRANCISCO -- A roughly 50% spike in chipmaker

Siliconix's

(SILI)

stock over two days may seem, well, silly. But even after another jump Friday, investors say the stock still is a value in an all-but-ignored sector of the blazing chip market: dull but increasingly valuable components for communications devices.

Siliconix makes power management chips, which are essential for portable computing devices, such as Palm Pilots from

3Com

(COMS)

, and cell phones. On Thursday, its stock rose 46% to 128 1/2 on news of a 3-for-1 stock split. It continued its climb Friday, closing at 135 1/8 a share.

Siliconix's sharp rise is part of the

Nasdaq's

incredible run this year. It's up about 70% and set yet another record Friday. The index has benefited from investor confidence in the outlook for everything from cell phones to the Internet. And the rise has built upon itself as investors chase the latest hot stocks.

Semiconductor stocks have benefited from these same trends. After all, cell phones and communications equipment need chips. So far this year the

Philadelphia Semiconductor Index

has soared 89%.

Siliconix was an unknown for much of the year. It has average daily volume of just 22,727 shares -- which also means that relatively insignificant news can cause major fluctuations. Of the 9 million shares outstanding, 80% are owned by

Vishay Intertechnology

(VSH) - Get Report

, an electronic-components maker.

Dash down some thoughts on our Nasdaq board

So the Santa Clara, Calif.-based company's small float, or the number of shares available to trade, magnified the stock-split news as investors dove in. But some already were in on the stock in a bid to find undervalued plays in the chip sector.

David Diamond, a

High Rock Capital

portfolio manager, has been holding the stock because it fits his criteria -- a good company the market has all but ignored. "We own a lot of companies that no one has ever heard of and we buy them when no one is paying attention," Diamond says.

And it still represents a value, some investors and analysts say.

At current levels, the stock is trading at only 28 times 12-month trailing earnings. For a chip company these days, that's bargain-basement levels. Consider that another power management company,

Micrel

(MCRL)

, is trading at 90 times trailing earnings. And

Texas Instruments

(TXN) - Get Report

recently paid $38.60 a share in stock for power management chipmaker

Unitrode

, which put Unitrode's trailing P/E at 48.

Siliconix is the lead supplier of power management chips to

Motorola

(MOT)

.

"It's a cheap way to play the mania in the cell-phone business," says Roger Norberg, an analyst at

U.S. Bancorp Piper Jaffray

who doesn't cover Siliconix but does cover Vishay. Piper hasn't performed underwriting for either company.

But there are other ways to play this sector, too.

Jon Joseph, a chip analyst at

Salomon Smith Barney

, says

International Rectifier

(IRF)

is another affordable chip stock.

"IRF is a huge value," says Joseph, whose firm hasn't performed underwriting for International. "I like these kind of names that are still undervalued and undiscovered."

Its trailing P/E is 46.

High Rock Capital's Diamond also likes

General Semiconductor

(SEM) - Get Report

, another maker of inexpensive commodity chips. He expects it'll show strong earnings growth. High Rock Capital owns General Semiconductor shares. Trading around 13, General is priced at 13 times its 2000 consensus earnings estimate, which compares favorably with its competitor

Fairchild Semiconductor

(FCS)

, which trades at 24 times its 2000 consensus earnings estimate.

Another example is Siliconix's parent, Vishay. It makes capacitors, tiny devices that act like noise filters on a chip, which are inexpensive components essential to communications devices. Piper's Norberg rates it a strong buy. In a growth cycle, companies like Vishay and competitors

Kemet

(KEM) - Get Report

and

AVX

(AVX) - Get Report

show increasing revenue and profits as prices for their products rise.

They should do even better this cycle, Norberg says. While a quarter of the business historically has gone to Japanese suppliers, they may be less of a threat now: High demand in Japan is soaking up their business; the dollar is weak against the yen; and economic reforms may limit the capital that manufacturers there can raise to buy equipment needed to meet rising demand.