What are we looking for?
Semiconductor stocks that are out of favour but are financially sound.
The sector seems to be forgotten by many investors. The slowdown in demand for personal computers and servers has led to an oversupply in dynamic random access memory (DRAM) chips. This, in turn, has led to tough times for semiconductor stocks, with many seeing their share prices plunge over the past year. At Lorne Steinberg Wealth Management, we decided to look for semiconductor manufacturers that are trading at attractive valuations and that are still cash-flow positive.
The screen
Using S&P Capital IQ, we screened for semiconductor companies in developed markets with a market capitalization of $1-billion (U.S.) and higher. We then wanted the screen to list all the companies in the sector with a price-to-book value of 2.5 times or less and that had generated positive free cash flow over the past 12 months. (That is, levered free cash flow, as defined by S&P Capital IQ.) Finally, we also wanted the screen to display the percentage change in each stock's share price over the past year and each company's debt-to-equity ratio.
What we found
Our list is heavily dominated by U.S. companies and many have seen their share price fall quite sharply over the past year. One of the larger companies on our list has also been one of the hardest hit. Micron Technology Inc. has seen its share price plummet 53 per cent over the past year as more than 50 per cent of the company's sales come from DRAM chips. The decline in Micron's share price, and the resulting valuation, has led to speculation that the company is now a takeover target. In July, Tsinghua Unigroup, the Chinese state-backed investment group, made a takeover bid for Micron at $21 a share. The offer was later rejected.
One stock that has performed very well is Cirrus Logic Inc. Cirrus has seen steady growth in revenue and net income in recent quarters and the company raised its revenue guidance earlier this year. This has led to a 20-per-cent jump in Cirrus' share price over the past year. In the past, Cirrus' shares have typically traded at a discount because its fortunes were closely tied to one customer: More than 60 per cent of the company's sales have come from Apple Inc. and this is not expected to change substantially in 2015. However, in the future, Cirrus hopes to diversify its customer base for its audio technology from the iPhone to include mid-range smartphones as well.
As always, investors are advised to do their own research before purchasing any of the stocks listed here.
Samuel Oubadia is a portfolio manager at Lorne Steinberg Wealth Management in Montreal.