Technology

3 Semiconductor Stocks to Buy That Could Outperform Into 2016

If you are a technology investor, especially in the semiconductor arena, it has been a very difficult year. A huge slowdown in personal computer sales, combined with currency headwinds and other issues, has made it a nightmare. In a new report, while Jefferies does not call for a full-fledged bull market in chips, the firm does think we may have finally seen, or at least be close to, a bottom.

The Jefferies team notes that although chips underperformed for the second quarter in a row, they see the group set to outperform the rest of the year and possibly into 2016, citing three huge items.

  1. Estimated cuts and overall underperformance is currently more than priced into the stock at this point.
  2. The supply chain is finally working its way through big inventories, and the chips may be setting up for an inventory restocking phase as revenue growth seems to have finally hit the bottom.
  3. Companies’ capital expenditure and utilization cuts could lead to longer lead times and prove to be a big catalyst.

The analysts are focused on three top stocks to buy now that they think will outperform over the last half of this year and very possibly well into next year.

Avago

This company recently made big headlines with a blockbuster buyout of chip giant Broadcom. Avago Technologies Ltd. (NASDAQ: AVGO) was originally a part of Hewlett-Packard and gets a huge chunk of its business from Apple and Samsung. It is a big provider in the cloud/hyperscale data center and networking areas. In fact, the company recently announced it will demonstrate its latest optical transceiver technologies for next generation data center and enterprise storage applications. As data center networks transition to 100G speeds to support higher bandwidth demands, technical challenges emerge across various levels of the network from storage endpoints to servers to top-of-rack and core switches.

Some on Wall Street feel that the purchase of Broadcom could add as much as a whopping $14 of earnings-per-share power to the company, and that with the addition of Broadcom that the market should reward the company with a higher multiple. A higher multiple would ultimately equal a higher stock price.

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Jefferies recently moved the stock to a Buy rating from Hold and has a $179 price target. The consensus price target is $169.19. Shares closed on Tuesday at $122.24.