The average semiconductor industry stock, as represented by the SPDR S&P Semiconductor ETF ($XSD) is up about 10% YTD, as expectations rise that the global economy will recover this year. The semiconductor industry is the life-blood of our digital economy, enabling our computing devices, automobiles, and all sorts of electronic gadgets, as well as our industrial and defense infrastructure. In this article, we cover the investing activities of the world's largest money managers or mega funds in fabless semiconductor group stocks, based on our research of the latest available institutional 13-F filings. In successive articles, we will also cover their investing activities in semiconductor manufacturing companies, and in semiconductor equipment companies.
Taken together these mega fund managers, managing between $50 billion and over $700 billion in 13-F assets, control over 35% of the assets invested in the U.S. equity markets, but number just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets. Also, taken together, they are bearish on the semiconductor group, including fabless and semiconductor manufacturing companies and foundries, cumulatively cutting $2.91 billion in Q4 from their $145.85 billion prior quarter position (for more general information on these mega funds, please look at the end of the article).
The following are the fabless semiconductor company stocks that these mega fund managers are most bullish about, that are undervalued compared to the peers in their group, and have also outperformed YTD on a relative basis to the peers in their group (see Table):
Broadcom Corp. (BRCM): Broadcom provides a portfolio of system-on-a-chip and software solutions for wired and wireless communications to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. Mega funds together added a net $264 million in Q4 to their $7.71 billion prior quarter position in the company, and taken together mega funds hold 40.8% of the outstanding shares. The top buyer was T Rowe Price Associates, with $288 billion in 13-F assets ($291 million), also the top holder at $1.70 billion.
BRCM reports its Q1 (March) quarter results on Tuesday, May 1st, after the close of market. In its latest Q4, it beat analyst revenue and earnings (68c v/s 65c) estimates, and the shares currently trade at 11-12 forward P/E and 3.1 P/B compared to averages of 15.8 and 1.9 for its peers in the communications semiconductors group, while earnings are projected to rise modestly from $2.89 in 2011 to $3.21 in 2013. The stock has been a relative outperformer, up almost 25% YTD, compared to the 10% rise for the average semiconductor stock.
It is widely expected that the company's Q1 will beat expectations, especially after the blow-out Apple Inc. (AAPL) earnings earlier this month, and a number of brokers, including most notably JPMorgan, have recently issued bullish statements on BRCM. JPMorgan earlier this month included BRCM in its list of 15 companies that have the potential to be the next AAPL, probably the best investing accolade that can be given to a stock given AAPL's outperformance over the past decade, based on their secular growth opportunities, strong market position and attractive valuation.
LSI Corp. (LSI): LSI is a designer of complex high-performance ICs and storage systems. Its silicon-to-systems solutions are at the heart of products that create, store, consume and transport digital information. Its ICs are used in hard disk and solid state drives, high-speed communications and storage systems, computer servers and PCs. Mega funds together added a net $9 million in Q4 to their $1.25 billion prior quarter position in the company, and taken together mega funds hold 27.4% of the outstanding shares. The top buyer was Atlanta-based investment powerhouse INVESCO Ltd., with over $650 billion in assets under management ($67 million), and the top holders were Vanguard Group, with $1.6 trillion in assets under management ($267 million), and State Street Corp., with $565 billion in 13-F assets ($197 million).
LSI stock has also been a relative outperformer in the semiconductor group, up about 33% YTD v/s the 10% rise for the average semiconductor stock. The company reported a good Q1 (March) last Wednesday, beating revenues and earnings (20c v/s 14c) estimates, and guiding Q2 earnings in-line and revenues above consensus estimates. The stock currently trades at 9-10 forward P/E and 4.2 P/B compared to averages of 23.4 and 1.9 for its peers in the electronic components semiconductor group, while earnings are projected to rise at a strong 33.7% annual rate from 47c in 2011 to 84c in 2013. The company was recently included by Bank of America in its list of 30 "Global Wave" stocks that it believes will perform well in a global economic upturn.
Advanced Micro Devices (AMD): AMD is the second largest producer of microprocessors, GPUs and chipsets in the world, behind market leader Intel Corp. (INTC). Mega funds together added a net $7 million in Q4 to their $1.89 billion prior quarter position in the company, and taken together mega funds hold 37.0% of the outstanding shares. The top buyer was diversified financial services provider Ameriprise Financial, with $131 billion in 13-F assets ($78 million), also the top holder at $592 million. AMD beat analyst revenue and earnings in its most recent Q1 report on Thursday before last week. Its shares have outperformed the group, up over 35% YTD, and they trade at 8-9 forward P/E and 5.1 P/B compared to averages of 23.4 and 1.9 for its peers in the electronic components semiconductor group.
The following are some additional fabless semiconductor company stocks that mega funds accumulated in Q4 (see Table):
- Spreadtrum Communications Inc. (SPRD): SPRD is a Chinese fabless designer of baseband processor and RF transceiver solutions for wireless communications market, in which mega funds together added a net $19 million in Q4 to their $70 million prior quarter position in the company;
- Silicon Motion Technology Ads (SIMO), a Taiwanese designer of micro-controllers, universal serial bus flash drivers, card readers, and embedded flash, in which mega funds together added a net $2 million in Q4 to their $20 million prior quarter position in the company; and
- InvenSense Inc. (INVN), that is a provider of micro-electro-mechanical systems gyroscopes for motion processing solutions in consumers electronics, including video game devices, handsets and tablet devices, digital still and video cameras, digital television and set-top box remote controls, 3D mice, portable navigation devices, and household consumer and industrial devices, in which mega funds together added a $1 million new position in Q4.
Besides these, mega funds based on their Q4 trading activity indicated that they are bearish on the following stocks in the fabless semiconductor group (see Table):
- Marvell Technology Group (MRVL), a leading fabless semiconductor company that designs, develops and markets analog, mixed-signal, digital signal processing, and embedded and stand-alone ARM-based microprocessor IC's, used for high-speed, high-density, digital data storage and broadband digital networking markets, in which mega funds together cut a net $123 million in Q4 from their $2.99 billion prior quarter position in the company;
- PMC Sierra Inc. (PMCS), that designs, develops, markets and supports high-performance internet infrastructure semiconductor networking solutions that enable the transportation and storage of large quantities of digital data, in which mega funds together cut a net $76 million in Q4 from their $678 million prior quarter position in the company;
- 3D graphics processor designer and developer NVIDIA Corp. (NVDA), in which mega funds together cut a net $59 million in Q4 from their $4.07 billion prior quarter position in the company;
- ARM Holdings PLC ADS (ARMH), a British designer of microprocessors and physical IP components used in mobile phones, computing devices and digital TVs, in which mega funds together cut a net $38 million in Q4 from their $1.36 billion prior quarter position in the company; and
- MIPS Technologies Inc. (MIPS), that is a provider of industry-standard processor architectures and cores that power various home entertainment, communications, networking, and portable multimedia products, in which mega funds together cut a net $4 million in Q4 from their $56 million prior quarter position in the company.
General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors 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.
Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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