Friday's jobs report was a crushing body blow to seal a month of bad news and bad price moves. Slowdown appears to have arrived in the U.S., and everybody is hunkering down and waiting for the next downward leg. Economics being what it is, this hunkering down will only fuel the negative cycle, until people with money start convincing themselves that everything is ok and the positive cycle starts again (for a better explanation, read the George Soros speech from the weekend).
In a negative cycle, a semiconductor stock appears to be the worst sort of stock to own. A risky technology stock will fly high in a positive market but get hammered when the bears come out. The bears are out. So mentioning a pick in this sector seems like pure folly given the current market sentiment.
But sentiment being what it is, it will turn around. Sooner or later, we'll hit a more positive period. In the meantime, the negative period becomes a buying opportunity. It's hard to buy in bumpy periods as the bottom keeps dropping, and today's bargain becomes tomorrow's lemon. But having a list ready and entering carefully for investors with cash in their portfolio - cash that could have been raised over the positive four months of the year, for example - will give investors a great chance at beating the market.
Still, easier said than done, which is why I'm touting Skyworks Solutions (SWKS) as a safer beta play. The Woburn, MA based firm is a technology company that produces "high reliability analog and mixed signal semiconductors". The company most notably makes these semiconductors for smart phones and tablets, though also in support of a variety of other technologies. The company's key customers include Apple (AAPL), Samsung (SSNLF.PK), Foxconn International (FXCNF.PK), Amazon.com (AMZN), Nokia (NOK), and Research in Motion (RIMM), among many others.
Chip stocks tend to be volatile, and on a daily basis Skyworks certainly lives up to that standard. A look at its 3-month chart will find 18 days where the stock price swung more than $.70 from one day's close to the next, a move of about 2.77% at Friday's closing price; seven of those days were positive, eleven were negative. Last week, for example, the stock swung up by more than $.70 Tuesday and Thursday, and down by more than that threshold amount on Wednesday and Friday.
Over the course of the week, however, the stock was down only 1.75%, pretty good compared to the general market drubbing. Skyworks is levered to the secular boom of smart phone and tablet adoption and development, as well as the connectivity-everywhere revolution, trends that have a lot of room to run. Through achieving deals and increasing design wins with each of the major smart phone developers, Skyworks has set itself up for a steady business and growth plan. While the market can't quite make its mind up about the company from one day to the next, the overall trend favors the company.
Skyworks has had an attractive performance record over the past few quarters as well. The company has beat earnings and revenues estimates five quarters in a row, if usually by incremental amounts. Skyworks has only issued one below-expected quarterly guidance in that period, and then outperformed that guidance to make up much of the difference - this for the company's fiscal Q1 2012, which was CY Q4 2011. This steady, not quite spectacular performance again lends a safer feel to Skyworks.
Skyworks' debt position also insulates the company should we enter any really difficult periods. The company has a current ratio of 3.3, a quick ratio of 2.5, and a cash ratio of 1.66. The company also has no long-term debt and a minimal amount of short-term debt. Skyworks's cash pile decreased from FY 2010 to FY 2011, but that can easily be attributed to the cash acquisition of Advanced Analogic. A downturn should not sink Skyworks.
Skyworks also has a compelling valuation when compared to its peers:
(Sources: TDAmeritrade, WSJ)
As of Q1 2012
Quarterly Revenue Growth (Y-over-Y)
Linked Quarterly Revenue Growth
Yearly Revenue Growth
EPS Growth (Annual)
Estimated Earnings Growth (next 3 years)
Earnings 2012 (Est.)
Earnings 2013 (Est.)
Free Cash Flow 2011
Dividend (Yield %)
Price Movement last 3 months
Price Movement last 12 months
(*NXPI and AVGO EPS growth is for only one year; **ARMH's forward earnings growth is for only two years)
The table can be read a number of different ways. Qualcomm is the biggest name in this group, with the biggest dividend, but also has the highest forecast growth rate aside from ARMH, which makes it attractive. NXPI almost offers a value growth play, at least in a speculative sense, though it is levered to the near-field communications trend that is not quite as established as the overall connectivity trend; still, NXPI interests me and I wouldn't fault anyone who saw them as the play here. Avago Technologies is a Skyworks competitor with a dividend and a cheaper valuation, so also attractive.
What I'd like to direct your attention to, however, is the bottom of the table. Skyworks, despite its erratic daily fluctuations, has had the steadiest growth in price, which is ultimately what investors care about (even if it is an irrational representation of earnings and all the rest of the picture). This is the only stock among the group that has gained value over the past year, and it has declined the least since March. The company is tracking just ahead of the S&P 500 (SPY) and the Nasdaq (QQQ) over each of those periods as well.
I've simplified the picture a little; the chart below shows that in last fall's swoon, Skyworks dropped deeper than anybody but ARM Holdings. Skyworks also took a big hit in the first half of 2011, before the past 12-months snapshot that I've taken.
Skyworks remains, however, an attractive and relatively safe growth play. The company is well-positioned to benefit from several secular trends. Usually mentioned as a strong Apple derivative play, Skyworks has a wide variety of customers to add diversity to its portfolio, while still doing well with Apple by all indications. The company's performance has been solid and, downturn fears notwithstanding, that performance should continue. Assuming the company hits earnings estimates and shows the promise of continued growth, with catalysts such as the Iphone 5 or maybe even an Apple TV, a 15x multiple on 2013 earnings, hardly unreasonable, yields a target price of $32, a 26.8% increase from June 1st closing price.
The stock is no doubt going to take hits over the coming days and months as the investing mood turns negative and risk-off plays become the norm. For longer-term investors, these sorts of periods are when the buying should be done, rather than in the good times. The first week in June may not yet be the best time to buy, as the fall could just be beginning, but investors can prepare their shopping list. With positioning, performance, valuation, balance sheet, and stock price performance all swinging positively for Skyworks Solutions, the company deserves a look for filling the tech part of your buy list.