Attractive Valuations In These Semiconductor Stocks Make It Now The Time To Buy

by: Brian Gorban

Finding stocks trading with favorable valuations, such as these here, are always a good bet to outperform the market as many value fund managers over the decades have shown us. In these volatiles times, it's also beneficial to find stocks with heavy institutional ownership since they tend to provide strong price support as they have holding periods longer than seconds or minutes. Here were some I brought up recently and have since found more that not only have strong institutional ownership, but some very nice dividend yields as well:

United Microelectronics (UMC), based in Taiwan, operates as a semiconductor wafer foundry. The stock recently took a big hit as it reported its monthly sales in August fell almost 25% year-over-year. However, the selling looks to be overdone, as the stock is selling very cheaply at 7x price/earnings, 0.75x price/book, over $1 billion in net cash, and a large 7% dividend yield. Moreover, its payout is a very small 34%, leading me to believe that even with their recent sales miss, the dividend is not only secure, but likely to be raised. The stock is a buy.

KLA-Tencor (KLAC), based in California, engages in design, manufacturing, and marketing for the semiconductor and related nanoelectronics industries. This stock as well is trading at rather inexpensive levels at just over 9x price/earnings and a 3.3% dividend yield, while the company has the strongest gross margins of the bunch in excess of 60% and operating margins greater than 35%. Lastly, the dividend payout ratio is under 25%, giving investors confidence that the dividend is not only secure, but management will continue raising the dividend. This stock is a great buy at these levels.

Brooks Automation (BRKS), based in Massachusetts, provides automation, vacuum, and instrumentation solutions primarily to the semiconductor manufacturing industry worldwide. The stock is trading very cheaply at just 4.2x price/earnings, 0.8x price/sales, 1.1x price/book, and a 3.5% dividend yield. Moreover, the dividend looks very safe, the company has no debt and more than $3 per share in net cash. This is a safe buy.

Applied Materials (AMAT) is based in California and provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic and related industries worldwide. This is the largest company of the group, and the stock valuations look compelling, trading at 7.8x price/earnings, 1.3x price/sales, 1x enterprise value/revenue, and a 2.9% dividend yield. Moreover, with the current payout ratio at a paltry 20%, the dividend is not only secure, but likely to be raised, as management has been doing well. This stock is a little richer than the others, but I think it's worth the small premium, as it is the dominant company in the sector and has the most diversified revenue stream. This is a buy at these levels.

Lam Research (LRCX) is another stock in the sector selling cheaply. It trades at 7.5x price/earnings and 1.2x enterprise value/revenue. However, with the other options mentioned above, I'd rather own one of those and get a nice dividend along with attractive valuations.

In a recent article I discussed how Intel (INTC) looks enticing as well, with its approximate 3.7% dividend yield, trading at 10.6x price/earnings, and very strong net cash position of over $9B. Moreover, Tessera (TSRA) is very enticing as well as I wrote here with its very large net cash position greater than $10/share, and nice valuations at 12.5x price/earnings, 1x price/book, and .6x enterprise value/revenue.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UMC, TSRA, INTC over the next 72 hours.