Semiconductor Portfolio With Yield And Growth In Mobile Platforms And Cloud Computing

by: The Wall Street Transcript

Semiconductor stock price volatility can create headaches for investors. Moore's Law means engineers double the number of transistors per integrated circuit every two years and this relentless innovation wreaks havoc for corporate treasurers as heavy R&D investments and capital intensive silicon chip factories often become obsolete before a return can be collected.

Currently, expert research analysts focus on two long term growth trends so they can sleep at night. The accelerating conversion from desktop software to cloud computing and the endless consumer demand for greater mobility in computer form factors creates a "sweet spot" for growth in the semiconductor industry.

An investor can participate safely with a "do it yourself" semiconductor company that has both current income and access to both of these growth segments. This "synthetic" stable dividend payer is positioned for future growth with a select group of smaller cap semiconductor stocks that supply key components for the two trends. Betsy Van Hees, Vice President of Equity Research covering the semiconductor industry at Wedbush Securities picks her stocks this way in a recent interview:

"We see Broadcom (BRCM) as a safe derivative play to Apple (NASDAQ:AAPL). Broadcom is a leading supplier of connectivity combo solutions across Apple's mobile product, like iPhones, iPads and iPod Touch…As for Cypress (NASDAQ:CY), they are a leading supplier of capacitive-touch products that go into consumer products, like e-readers, smartphones, feature phones and tablets. We see capacitive touch as a very pervasive trend not only in the consumer market but industrial, automotive and personal computing."

Stephens Inc., the Arkansas investment firm, also picks a stock with an exposure to Apple. In a September 28th interview the lead semiconductor sector research analyst identified his favorite:

"the Apple play we have, a stock called OmniVision (NASDAQ:OVTI), which makes camera sensors for a lot of people, but primarily for Apple. We estimate that Apple is as much as 35% of revenues. And they, in fact, guided last week an upside to revenue estimate by 100-something million dollars. And that tells me flat out that the Apple play is on."

His "Apple Play" is also combined with a bet on the continuing demand for faster and faster data connectivity in the U.S.:

"There is also a 4G wireless upgrade cycle that is happening in the U.S., and one of the best, most exposed stocks that we have to the optical side is Semtech (NASDAQ:SMTC). This is a company that makes SerDes products for the 40- and 100-gig long-haul markets. They are the only ones in the market that deal with this product. And so you pretty much have a choice. You either develop the products on your own, or you go to Semtech and buy it."

The transition of even large enterprise customers to cloud computing software solutions is also an area of accelerating growth and this will be impacting key semiconductor stocks for years. Hans Mosesmann, a Forbes Blue Chip Analyst veteran semiconductor industry analyst with Raymond James & Associates (RJM) likes solid state memory exposure for low cost servers that support both cloud computing and future mobile product offerings:

"Names that are higher quality that we have identified as ones that have particular positioning with some interesting demand dynamics or product cycles...the enterprise solid state storage area with LSI (NASDAQ:LSI-OLD) or with Windows RT as we see in the Microsoft (NASDAQ:MSFT) launch of that product in October where I think NVIDIA (NASDAQ:NVDA) is going to do very well."

Rounding out the picks for our synthetic semiconductor stock portfolio of semiconductor stocks is LAM Research (NASDAQ:LRCX). Visal Shah, the All American stock picker from Deutsche Bank Securities, sees LAM as a chief beneficiary of the coming upsurge in demand:

"We think that as the supply/demand comes to somewhat of a balance in 2013, some of these spenders are going to start adding more capacity as far as the growth of smartphones and tablets continues because these are some of the other drivers for NAND. So our view is that memory spending comes back in 2013, which helps Lam Research."

The ordinary investor is therefore able to combine current income with participation in the mobility and cloud computing product cycles. The chart below outlines a high growth synthetic semiconductor portfolio with a current income of 2.3% for an investment of $25,000:

Company Ticker Price Shares Amount Dividend
Apple AAPL $666.80 6 $4,001 $63
Microsoft MSFT $30.03 100 $3,003 $92
Intel INTC $22.47 200 $4,494 $176
Cypress CY $10.72 500 $5,360 $220
Broadcom BRCM


50 $1,710 $20
Semtech SMTC $25.50 50 $1,275  
Omnivision OVTI $14.17 75 $1,063  
LSI LSI $6.99 150 $1,049  
NVIDIA NVDA $13.62 100 $1,362  
Lam Research LRCX $31.78 50 $1,589  
      Total $24,905 $572

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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