Despite the recent weakness in the markets, the one bright sector with potential for the rest of 2016 is technology, and a sub-sector in which there is some outstanding potential is the semiconductor arena. The old-school leaders are still meaningful players, but newer companies that are more alpha driven via restructuring and acquisitions are making waves and may yet prove to be the best stocks for investors to consider.
A new research piece from the team at SunTrust Robinson Humphrey notes that on the firm’s recent semiconductor bus tour several companies indicated to them that consolidation in the chip space has led to flattening and even rising average selling prices in some instances.
The SunTrust analysts have three top picks that they think are not only the cheapest, but the fastest growing, and all three are rated Buy.
This is the combined entity that was formerly known as Avago and Broadcom. Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Its extensive product portfolio serves four primary end markets: wired infrastructure, wireless communications, enterprise storage and industrial and other.
Applications for the company’s products in these end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems, and displays.
The company produces radio frequency (RF) front-end for LTE-enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple. Additional estimates are that the company has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or more quarter over quarter for the third quarter. Customer diversity and content for Samsung could be more than enough to offset slower Apple business.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand. The SunTrust analysts think the company is growing earnings at 13% organically, and that could lift to 17% with mergers and acquisitions. Trading at 12.5 times 2017 estimated earnings, the stock is cheap.
Broadcom investors are paid a 1.26% dividend. The SunTrust price target for the stock is a stunning $211, and Thomson/First Call consensus price target is set at $192.07. The stock closed Tuesday at $158.99.