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No sooner than we published our Nasdaq 100 Watch List on Saturday March 20th outlining a preliminary case for chip manufactures, than integrated circuit manufacturer Intersil Corporation (ISIL) announced on March 22, 2010 that it will pay cash for semiconductor manufacturer Techwell (TWLL). Although it was luck that our suggestion to examine the chip sector came just before the acquisition of Techwell, the fact that the purchase was done with cash is a testament to the fact that the chip manufacturers have abundant cash or are under priced and undervalued. Techwell rose 47.75% during regular trading hours as Intersil will pay a premium of 48.71%.

For all intents and purposes, the chip sector lit up like a Christmas tree on the announcement of the acquisition of Techwell Monday. Our previous Speculative Recommendation of Mattson Technology (MTSN), another wafer equipment manufacturer, is now about to breach the old high of $4.22 if the industry continues to heat up with activity.

We have said it many times before and will continue to reiterate the point that when a whole sector or industry starts to appear at or near a new low then it typically indicates that the companies within that industry are undervalued. It only takes a cursory look to verify if this assumption is correct. Once it can be verified that companies in a specific industry are undervalued, you can rest assured that the mergers and acquisitions will begin. The fact that cash is being used to buy up companies is the final nail in the coffin on the theory of an undervalued sector.

Since we started the New Low Observer, we have been able to identify the water sector, the biotech/pharma sector and the medical device sector as undervalued before acquisitions or substantial price gains occurred. It should be noted that we don't have any special skills, just the willingness to carefully observe and sometimes buy companies that have fallen to a new low. Get the research going for the companies that are part of the chip sector, and never chase a stock that has a rising price.

Disclosure: No positions

Source: Undervalued? Intersil Pays Cash for Techwell