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What are we looking for?

U.S.-listed semiconductor stocks with reasonable valuations and strong prospects for future growth.

In the past 12 months, the information-technology sector has been one of the highest flying components of the U.S. market. The semiconductor industry has been a big part of this growth with the Philadelphia Semiconductor Index up more than 18 per cent in the past year. Consolidation is also hitting the industry as companies look for ways to boost their growth. In March, NXP announced that it was merging with Freescale Semiconductor in a deal valued at more than $40-billion (U.S.).

The screen

We will be using Recognia Strategy Builder for our search. We begin by setting a minimum market cap threshold of $10-billion. We wish to limit ourselves to the larger, more stable portion of the market.

Next, we will look for semiconductor stocks with strong prospects for growth based on their projected earnings-per-share growth rate. We will select only stocks with projected EPS growth this year of 10 per cent or more.

In addition, to home in on companies with efficient operations, we will only select companies with operating margins greater than 10 per cent. Operating margin is a measure of how much profit a company makes for each dollar of revenue.

Finally, to ensure we don't overpay for our investments, we will screen for companies with reasonable forward price-to-earnings ratios. We will select only companies with forward P/E ratios of 30 or less.

More about Recognia

Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas including daily updates on 72,000 investment instruments and 800,000 options contracts. Recognia analyzes data from 85 exchanges worldwide providing technical and fundamental research on stocks, ETFs, indexes, forex, options and commodities.

What did we find?

Intel Corp. ranks No. 1 and is also the largest company on our list with a market cap of $156-billion. It has strong operating margins of 28.3 per cent and a very reasonable forward P/E ratio of 14.6. Though Intel has been stung by the move from traditional PCs to tablets and mobile devices, it still has a very strong business and is expected to grow earnings by more than 14 per cent this year.

NXP Semiconductors NV of the Netherlands has the highest projected EPS growth rate on our list at 77 per cent. As noted above, NXP announced a merger with Freescale Semiconductors of Austin, Tex., last month. The combined entity will be among the largest semiconductor firms worldwide with combined annual revenue of more than $9-billion.

San Jose, Calif.-based Altera Corp. is a leading provider of programmable logic devices (PLDs). In late March, The Wall Street Journal reported that Intel was in talks to acquire the company. Altera stock jumped by 24 per cent the next day. On April 9, Intel was reported to have dropped talks – causing Altera stock to drop more than 10 per cent. The company retains some of its premium valuation based on it being seen as a takeover candidate.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

U.S. semiconductor companies