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Leading hedge fund and mutual fund managers that have a long-term track record of generating high market-beating returns are neutral on the semiconductor manufacturing group, adding a net $9 million (including cutting $904 million and adding $913 million) from their $6.73 billion prior quarter position in the group. Overall, they are under-weight the group by a factor of 1.6. That is, taken together, 70+ high alpha or guru funds have invested 1.3% of their assets in the group, significantly less than the 2.1% weighting of the group in the overall market.

However, seven of these guru funds have invested three times that or over 3.9% in the semiconductor manufacturing group. The following is part II our take on their top picks in the group. Click here to return to part 1.

Gurus Bullish on NXP Semiconductors NV (NXPI): NXP is a Netherlands-based global designer and manufacturer of high-performance mixed-signal semiconductor solutions. High-performance Mixed Signal solutions are an optimized mix of analog and digital functionality integrated into a system or sub-system. The company's expertise is in RF, analog, power management, interface, security and digital processing products. NXP's solutions are used in a wide range of automotive, identification, wireless infrastructure, security and digital processing products. Guru funds aggressively added a net $141 million to their $112 million prior quarter position, and now hold 4.0% of the company shares.

NXP currently trades at a very cheap forward price-to-earnings ratio (P/E) of 7, while earnings are projected to be on a tear rising strongly from $1.17 reported in 2010 to $2.42 projected for 2011 and to $3.22 in fiscal year 2012. Barclays is the only analyst covering the stock, and they have an overweight rating on it with a price target of $36, well above the current $21.69 price. The stock has corrected 39% from recent highs in April and is very attractively priced given the low valuation and the projected high growth. Furthermore, NXP is perfectly poised to capitalize on the emerging trend in near field communications (NFC) payments that will enable a smart phone or tablet with an NFC chip, such as the ones made by NXP, to make a credit card payment or serve as a keycard or ID card. NXP makes the NFC chip that runs Google (NASDAQ:GOOG) Wallet and ensures the security of the transaction, and demand for the NFC chips are projected to grow exponentially once the technology ramps up, and the use of Google Wallet becomes more commonplace. We reiterate our previous buy on NXPI issued July 19th, and would continue to be aggressive buyers at current prices.

Gurus Bullish on Intel Corp. (INTC): Intel is one of the world’s largest manufacturers of semiconductor chips, including microprocessors, chipsets, network processors, motherboards, non-volatile memory and storage. Its products are used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds. Guru funds aggressively added a net $133 million to their $1.8 billion prior quarter position. This includes two funds that are over-concentrated in the group, namely, Oakmark Funds / Harris Associates that holds $1.04 billion of Intel and added $20 million, and First Eagle Investment Management LLC that holds $265 million, including $81 million added during the quarter.

Intel trades at a projected forward P/E of 9, at the bottom of its historic range, while earnings are projected to rise at 11% compounded growth rate from $2.01 in 2010 to $2.49 in 2012. Analysts are bullish on Intel, and they have a mean target of $26, with a high of $32, above the current $22 price. Of the 51 analysts that currently cover the company, 30 rate it at buy/strong buy, 18 at hold, and only three at underperform. As the worldwide market and technology leader in microprocessors, Intel is positioned to benefit from a possible pickup in enterprise spending fueled by Window 7 and new microprocessor upgrades. Meanwhile, it trades at its bottom range valuation, and his limited downside risk. Hence, we would agree with gurus and analysts on their bullish outlook for Intel.

Gurus Bullish on Triquint Semiconductor (TQNT): Triquint manufactures a broad range of high-performance RF, analog, and mixed-signal ICs for telecommunication products such as cellular phones and pagers, fiber-optic telecommunications equipment, satellite communications systems, high-performance data networking products and aerospace applications. Guru funds aggressively added a net $51 million to their $104 million prior quarter position in the company, and hold 8.1% of the shares. Triquint trades at forward 10 P/E, while earnings are projected to increase at 12% compounded growth rate from 83c in 2010 to $1.04 in 2012. Analysts mean target is $14, well above the current $10 price. Of the eleven analysts that cover the company, eight rate it at buy/strong buy and four rate it at hold.

Gurus Bullish on Texas Instruments (TXN): Texas Instruments is a global manufacturer of ICs and digital signal processors used in cell phones, navigation systems and PCs. Other semiconductor products include standard logic, application- specific integrated circuits, reduced instruction-set computing microprocessors, microcontrollers and digital imaging devices. Gurus together hold 4.19% of the shares outstanding, at over three times their weighting in the group, and they cut a minor net $56 million from their $1.64 billion prior quarter position in the company. Texas Instruments trades at a forward price-to-earnings (P/E) ratio of 11-12, in the bottom one-third of its historic P/E range. Analyst mean targets are $38, with a high of $44, above the current $30 price. Of the 40 analysts covering the stock, 23 rate it a buy/strong buy, 15 a hold and four rate it at underperform.

Gurus Bearish on ON Semiconductor Corp. (ONNN): ON Semiconductor is a manufacturer of power, analog, digital signal processing, mixed signal, advanced logic and data management ICs, used in numerous advanced devices ranging from high-speed fiber-optic networking equipment to the precise power management functions found in portable electronics. Its products provide clock management and data flow management for precision computing and communications systems, and power management for distributing and monitoring the supply of power to the different elements within virtually every electronic device. Guru funds aggressively cut a net $30 million out of their $107 prior quarter position in the company, and hold 1.7% of the shares. ON Semiconductor trades at a forward 6-7 P/E, while earnings are projected to rise at a 25% compounded growth rate from 89c in 2010 to $1.38 in 2012. Analyst mean target is $14, well above the current $9 price. Of the 20 analysts that currently cover the company, fourteen rate it buy/strong buy and six rate it at hold.

STMicroelectronics (STM): STMicroelectronics is a Swiss manufacturer of a broad range of ICs and discrete devices used in a wide variety of microelectronic applications, including telecommunications systems, computer systems, consumer products, automotive products and industrial automation and control systems. Guru funds hold only $6 million of stock in this $7 billion company, with all of it bought in the March quarter. STMicroelectronics trades at a forward 8 P/E, while earnings are projected to grow at 13% compounded growth rate from 74c in 2010 to $1.06 in 2012. Analysts are bullish on the company and have a mean price target is $12, well above the current $8 price. Of the thirteen analysts that currently cover the company, five rate it buy/strong buy, six at hold, and two at underperform/sell.

Table

High Alpha or Guru Fund and ManagerTotal Assets and Percent Portfolio in GroupMajor Positions in GroupMajor New Buys in GroupMajor New Sells in Group
Donald Smith & Co. (Donald Smith)$3.2 billion (6.4% in group)MU ($180m), SMI ($23m)NoneSMI ($5m), MU ($4m)
Third Point LLC (Daniel Loeb)$2.3 billion (6.1% in group)NXPI ($142m)NXPI ($48m)None
Oakmark Funds/ Harris Associates LP (Bill Nygren)$36.6 billion (5.0% in group)INTC ($1,036 m), TXN ($757 m), IRF ($23m)TXN ($120m), INTC ($20m)IRF ($14m)
Legg Mason Capital Management (Bill Miller)$13 billion (4.6% in group)TXN ($327m), INTC ($146m), IDTI ($54m), MU ($45m), CODE ($17m), NXPI ($11m)CODE ($17m)TXN ($101m), ONNN ($26m), MU ($19m), INTC ($10m), NXPI ($7m)
Weitz Wallace R & Co. (Wallace Weitz)$2.2 billion (4.0% in group)TXN ($88m)NoneTXN ($13m)
First Eagle Investment Management LLC$19.8 billion (4.0% in group)TXN ($282m), INTC ($265m), LLTC ($238m), ATML ($3m)INTC ($81m)TXN ($57m), ATML ($11m)
Al Frank Asset Management (John Buckingham)$515 million (3.9% in group)STM ($5m), INTC ($5m), DIOD ($3m), VSH ($2m), TXN ($1m), TSM ($1m), TQNT ($1m), MCHP ($1m), IDTI ($1m)STM ($5m), INTC ($1m)None

General Methodology and Background Information: The latest available institutional 13-F filings of 70+ high alpha or guru funds were analyzed to determine their capital allocation from among 50+ different industry groupings. These were then analyzed to determine which guru funds were over-concentrated in specific industry groups, relative to the weighting of the overall market in that group. Then the holdings of those gurus that were over-concentrated in a specific industry grouping were analyzed to determine what specific stocks they held, bought or sold in significant amounts during the quarter as an indication of their bullishness or bearishness about those stocks.

The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence or even go as far as constructing a model diversified portfolio based on the guru funds best picks.

Please note that each of the gurus has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 70-odd guru funds that justify their inclusion in this elite group were detailed in our previous articles, many of which can be accessed by clicking on the hyperlinks referencing them in the above Table and in article.

These high alpha or guru funds number less than 100 or less than one percent of all funds and they control almost ten percent of the U.S. equity discretionary fund assets.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Source: Top Semiconductor Manufacturing Picks by High Alpha Funds Concentrated in the Industry - Part II