Technology

Analyst Very Selective on Semiconductors: 4 Focus Stocks to Buy Now

MobilEye

This company continues to be one of the leading beneficiaries of the autonomous driving revolution. Mobileye N.V. (NYSE: MBLY) develops computer vision and machine learning, data analysis and localization and mapping for ADAS and autonomous driving technologies, primarily in Israel. It operates through two segments, Original Equipment Manufacturing and Aftermarket.

The company offers Roadbook, a localized drivable paths and visual landmarks using its proprietary REM technology through crowd sourcing, and proprietary software algorithms and EyeQ chips that perform detailed interpretations of the visual field to anticipate possible collisions with other vehicles, pedestrians, cyclists, animals, debris and other obstacles.

The company’s products also detect roadway markings, such as lanes, road boundaries, barriers and related items, and they identify and read traffic signs, directional signs and traffic lights. In addition, the company provides enhanced cruise control, pre-lighting of brake lights and Bluetooth connectivity, as well as related smartphone application.

Last year Mobileye announced four contract awards for semi-autonomous driving starting in 2018 and announced its intention to have a fully autonomous highway driving vehicle in serial production in cooperation with BMW and Intel in 2021.

The $63 SunTrust price target compares with the consensus target of $56.48. The stock closed Wednesday at $46.64.

Microsemi

This company could benefit from continued industrial demand and it is also a top pick at Deutsche Bank. Microsemi Corp. (NASDAQ: MSCC) offers a comprehensive portfolio of semiconductor and system solutions for communications, defense and security, aerospace and industrial markets.

Products include high-performance and radiation-hardened analog mixed-signal integrated circuits, power management products; timing and synchronization devices and precise time solutions, setting the world’s standard for time; voice processing devices; RF solutions; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ICs and midspans.

While it hasn’t actually announced a deal, the company is said to still be running a sale process after receiving takeover interest from Skyworks Solutions, according to people familiar with the matter. Microsemi hired Bank of Montreal last year to run a broader auction after Skyworks offered to buy the company, the people said, asking not to be named because the negotiations are private. The process is in the early stages, no deal is imminent and a transaction may not occur.

The analysts noted in a recent report:

We envision three ways for investors to profit in the company: (1) if the company executes reasonably well towards its 6-8% organic sales growth target, it should deliver revenue and earnings-per-share upside, lower financial leverage, and should be rewarded with a higher P/E multiple; (2) if the company pursues another acquisition after achieving 3.0x leverage (we estimate potentially in the first half of 2017) it will not likely achieve P/E multiple expansion, but will benefit from higher EPS estimates; (3) if the company is acquired, which management has openly discussed.

The SunTrust price target is $68, and the consensus target is $63.91. The shares closed most recently at $52.18.

While the huge upside is probably gone, all these companies offer aggressive investors some good potential for gains. It may be smart to buy partial positions here and see if we don’t get a pullback in the shares.

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