Two Beaten Down Stocks, Two Great Opportunities

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It seems like anything and everything that’s related to Apple (NASDAQ: AAPL) nowadays has a negative halo around it. On one hand, shares of Apple have been beaten down consistently over the past month and a half, while on the other, component suppliers for Apple’s products have also shared the pain.

Investors Unable to See Cirrus through the Clouds

Take Cirrus Logic (NASDAQ: CRUS) for instance. The supplier of audio codecs for iDevices posted a blowout quarter a few days back, with revenue jumping 91% and earnings doubling from last year. In addition, the company also said that it expects to post terrific results for the current quarter. But the Street decided to focus more on a slight decline in gross margin that Cirrus expects in one quarter next year, and hammered it some 20% after results.

But, Cirrus is one of the best companies to ride the iDevice revolution, and it might have even increased its content in the latest iPhone. Cirrus supplies audio codecs for the iPhone, the iPad, the iPad mini and the iPod Touch. It has two slots inside the iPad mini, one for the codec and the other one for the amplifier.

All these products taken together are most probably going to drive Cirrus’ revenue and earnings higher in the future. The holiday season is not too far, and Apple has its line up ready. Historically, Apple’s products have had record-breaking December quarters and it shouldn’t be different this time either, and an extended product portfolio could help both Apple and Cirrus further.

Moreover, Cirrus’ foray into LED lighting, which is a rapidly growing technology, is another plus. Hence, a steep drop in the stock price opens up a window for opportunists to get in at its current hammered down levels.

It is absurd when you read about a company that has thumped estimates convincingly and expects to do the same again, but investors take a different view and instead flee from the stock. And you should prepare yourself for another round of absurdity, as I will tell you about another stock which has shared the same fate as Cirrus Logic.

Falling from the Sky, but Should get up Again

Skyworks Solutions (NASDAQ: SWKS) is another well-known component supplier for Apple’s devices, consistently supplying power amplifier modules. It even doubled its presence in the iPhone 5 as against the iPhone 4S. But its shares have been under a lot of pain of late.

Late in September, Skyworks fell 21% despite reaffirming its guidance for the recently-reported fourth quarter. As I had pointed out then, investors’ greed seemed to be the prime reason behind the panic selling of Skyworks’ shares. And last week, Skyworks dropped around 17% after releasing its fourth quarter results.

The report was not bad, nor was the outlook. But it seemed as if investors’ greed was again at work. Skyworks’ fourth quarter was ahead of estimates, while it expects to miss narrowly on earnings in the ongoing quarter. In a nutshell, the situation was not so bad that it called for such a steep drop in share price.

Diversification is Not Bad, and Investors Should Know This

Maybe, investors were expecting that Skyworks will sound out a sky-high outlook like Cirrus Logic. But that wasn’t possible. While Apple accounts for around two-thirds of Cirrus’ revenue, Skyworks derived 27% of its revenue from Foxconn (or Apple) in fiscal 2011, which is a far cry from what Cirrus derives.

This could have proved to be Skyworks’ bane, as investors might have thought that since their company has a couple of spots in the iPhone 5, it should issue an astronomical guidance. But there couldn’t have been a lamer reason.

One of the basic tenets of building a portfolio, be it clients or stocks, is diversification. And Skyworks has diversified impressively. Unlike Cirrus, it counts both Apple and Samsung on its client list. Its power amplifier modules are found inside the flagship phones of both smartphone behemoths. And considering that it is present inside the Galaxy S III, it could well be possible that it has also been used in the Note 2 that has been selling at a good pace.

Opportunities Ahead

The company is focused on attaining its targets and expects to outperform the market in the future. For the ongoing quarter, Skyworks expects $450 million in revenue, which would translate into a 14% year-over-year jump. More importantly, it expects further improvement in gross margin in the current quarter. Skyworks aims to achieve a revenue run rate of $550 million per quarter along with an operating margin of 30%, and it seems to be on target for both.

Skyworks is looking to tap the huge opportunity in wireless connectivity. For example, it is looking at the Chinese market, where 3G users still comprise below 20% of the total number of subscribers. Moreover, Skyworks is expanding its wireless connectivity solutions from smartphones and tablets to other applications such as automotive, medical and connected homes.

It is developing solutions for LTE-enabled handsets that we can expect in abundance in 2013 with leading manufacturers. Skyworks has seen its addressable market in China double and looks well-positioned to ride mobile growth in the Middle Kingdom. In short, Skyworks has a lot of opportunity in the form of smartphones, tablets, computers and much more. Driven by all these, it expects its total addressable market to grow in the mid-teens.

The Bottom Line

Both Cirrus and Skyworks haven’t had the best of times recently. But their businesses remain as strong as ever, a fact which can’t be denied as both expect to record revenue gains going forward. If you are looking for two good value plays, and you are not a myopic investor, then these two stocks deserve a look. 

Dig Deeper

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TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Cirrus Logic. Motley Fool newsletter services recommend Apple. 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.

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