When an analyst upgrades a stock and accompanies that recommendation with a long-term positive outlook, it usually means good things are ahead for investors. Given the fact that analysts were pretty positive in terms of the semiconductor sector today, I wanted to focus on two stocks that were upgraded in the last 24 hours and some of the variables long-term growth investors should consider.
Entropic Communications (ENTR) - Analysts at DA Davidson upgraded the company to a "Buy" rating and have set a $7.00/share price target. In my opinion there are two catalysts potential investors should consider before establishing a position in the company. The first catalyst comes in the form of the company's profit and operating margins when compared to one of the company's direct competitors. In the last 12 months, Entropic Communications has demonstrated a reasonable Profit (4.41%) and Operating (9.33%) margins whereas direct competitor AU Optronics Corp. (AUO) has only managed to demonstrate negative Profit and Operating margins of -16.57% and -15.76%, respectively. The second catalyst to consider comes in the form of QE3 performance, which has seen the stock add roughly 19.92% to its share value.
According to FlyOnTheWall.com, "DA Davidson believes that Entropic may become the major SoC, or System on a Chip, supplier for boxes that Time Warner Cable (TWC) intends to use to support a planned rollout of its all-digital service. DA Davidson expects Technicolor to become a major supplier for the project, and the firm thinks that Technicolor's DTA, or Digital Transport Adapters, integrate Entropic's SoC solution. Time Warner Cable is beginning a pilot program of its all-digital offerings in Augusta, Maine, according to DA Davidson, which believes that the cable company may finish rolling out the product to all of its subscribers sooner than its five year target."
Linear Technology Corp. (LLTC) - Analysts at Zacks upgraded the company to an "Out Perform" rating and have set a $38.00/share price target. In my opinion there are two catalysts potential investors should consider before establishing a position in the company. The first catalyst comes in the form of the company's profit and operating margins when compared to one of the company's direct competitors. In the last 12 months, Linear Technology Corp. has demonstrated impressive Profit (31.43%) and Operating (45.95%) margins whereas direct competitor Maxim Integrated Products, Inc. (MXIM) has only managed to demonstrate Profit and Operating margins of 16.09% and 23.51%, respectively. The second catalyst to consider comes in the form of QE3 performance, which has seen the stock add roughly 11.01% to its share value.
According to LocalizedUSA.com, an analyst at Zacks noted, "Linear is a very good defensive play in uncertain macro conditions, given its focus on core industrial, communications infrastructure and automotive markets, which enables it to generate solid cash flows from one quarter to the next. Therefore, we are optimistic about its solid business model, excellent products, ability to generate strong operating cash flows and dividend yield that should offset the effect of uncertain near-term demand and a high debt burden. We therefore have an Outperform rating on LLTC shares."
Potential investors looking to establish a position in either ENTR or LLTC should do so with a small to moderate position and add to that position as both companies' developments begin to enhance bottom line numbers. On one hand, LLTC is expected to report earnings on October 16th and if the company surpasses the analysts' estimates of $0.46/share on revenue of $334.72 million we could certainly see a pop in the stock. If the company's EPS miss estimates (though I highly doubt that will happen) we will most likely see a sell-off of 3%-5%, which may in fact create an even better buying opportunity for potential investors. On the other hand, if ENTR can assist Time Warner Cable in its all-digital rollout (and allow for the cable service provider to complete its system wide digital conversion in under 5 years), potential investors could see the stock grow very nicely over the next 3-5 years.