Looking for the Next Hot Gizmo? Buy these 3 Stocks
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In light of all of the stress that Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) have shown in releasing the latest gizmo (be it a giant iPad or PC-oriented tablet), it's not hard to see why analysts are bullish on technology. The positive secular trends are being driven by opportunities arising from Moore's law, growing demand, and more discriminative consumers. While it is hard to speculate which tech company will release the latest hot product, there is one way that investors can hit the winning ticket: diversification… specifically, semiconductors. This industry supplies virtually all end tech markets and, ironically, is undervalued. I recommend buying shares in Intel (NASDAQ: INTC), Texas Instruments (NASDAQ:TXN), and Advanced Micro Devices (NYSE: AMD) before a market correction.
First, Intel is what you would call a "dividend champion." The company has steadily increased dividends over the last two decades and now offers a 3.4% yield. For a firm that is forecasted to grow 11.9% annually over the next 5 years, the company is also not rolling out the cash because of limited opportunities. Indeed, the PEG ratio currently stands at 0.95, which indicates that future growth has not been fully factored into the stock price.
At a respective 11.2x and 10.4x past and forward multiples, Intel is also well below its historical 17.7x average. Part of the discount stems from volatile free cash flow generation of late. FCF over the TTM ending 2Q12 was $9.5 billion in relation to $9.2 billion in 2Q10 with FCF being rocky between those two points. Even still, the general trend has been up. ROA are currently 330+ bps above the historical 5-year average, and SG&A spending has stayed at low levels despite strong top-line growth.
The company recently agreed to buy 15% of Dutch microchip producer ASML holding N.V. in a $3.1 billion deal. I am optimistic about this purchase, since it will improve cross-selling opportunities while reducing the cost of producing new computer processors. One RBC analyst has already expressed that the new system ASML is implementing will cut manufacturing costs by $2 billion… not too bad in terms of cost synergies.
Then there is brand name Texas Instruments, which, in my view, has a less favorable risk/reward ratio. It trades at 21.5x past earnings with a 2.3% dividend yield. It also has a growth forecast that is lower than Intel's at 9% annually for EPS. While I believe that the stock is a safe pick to accumulate some shares in, I encourage a larger investment in AMD. AMD is an overly beaten stock at 9.6x past earnings and 8.6x free cash flow. Yes, ROA, ROE, and ROI are all in the high negative double-digits and analysts rate the stock closer to a "sell" than a "buy," but the potential for huge risk-adjusted returns is substantial.
Earnings over the trailing twelve months ending 2Q12 was ($633 million) - worse than $828 million in the same quarter last year, obviously, but far better than the $3.7 billion loss in 2Q08. AMD has been very volatile of late, but it still has the fundamentals necessary to ride the waves of secular trends to prosperity. Despite solidly beating expectations in 1Q12, weak desktop sales in China and Trinity's cannibalization of Llano have still been overblown. But by focusing more on the notebook market, the company can help right the tide. While the PC market has plenty of opportunities, notebooks have even more.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Intel, and Microsoft. Motley Fool newsletter services recommend Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
