Merrill Lynch Says Jump on 5 Top Semiconductor Stocks Now


Institutional accounts decided to hit the door on tech stocks this week, and they hit it in a big way, like shoppers at Wal-Mart on Black Friday. The Nasdaq was hammered as typical year-end rotation selling came in hard, and portfolio managers took advantage of massive runs in tech stocks, especially the semiconductors. While the segment could remain volatile, the positive story remains in place, and while caution is probably warranted, it may make sense to pick away at some of the stocks that got hit.

A new Merrill Lynch research report from outstanding semiconductor analysts Vivek Arya makes the case that this week’s sell-off was market driven and not based on sector fundamentals. They also noted that large sell-offs in the PHLX Semiconductor Sector (SOX) index are not uncommon, but the stocks tend to rebound quickly.

The Merrill Lynch report focuses on five stocks that more aggressive accounts may want to look at after the brisk selling. All five are rated Buy at Merrill Lynch.

Advanced Micro Devices

After years of frustrating performance, Advanced Micro Devices Inc. (NYSE: AMD) appears to have turned the corner and is a hot commodity on Wall Street. It is one of the largest suppliers of PC microprocessors and graphics processors worldwide to computing original equipment manufacturers. The company’s main product lines include desktop, notebook and graphics processors, and embedded/semi-custom chips.

The analyst feels that AMD, which is releasing the first major offering in five years, the Ryzen chipset, is in his words “uniquely positioned” to compete with the big players like Intel and NVIDIA in the $50 billion total addressable market for personal computers, gaming, artificial intelligence and servers.

In September, CNBC reported that Tesla is working with AMD to refine an AI chip for autonomous driving tasks in its cars. Many think the unconfirmed partnership would make sense, and though most would not expect the shipment of AMD chips to Tesla to have a material impact near term, it would constitute a critical win for AMD and support the thesis that the company is a primary beneficiary of the shift to parallel processing graphics processing units.

The Merrill Lynch price target for the shares is $18, and the Wall Street consensus target is $14.30. The stock closed Thursday’s trading at $10.89 a share.

Cypress Semiconductor

This stock traded in a tight range from March until last month, but it looks to be breaking out. Cypress Semiconductor Corp. (NASDAQ: CY) manufactures and sells embedded system solutions for the automotive, industrial, home automation and appliances, consumer electronics and medical markets.

The company’s product portfolio includes programmable-systems-on-chip (PSoC), general purpose microcontrollers, analog integrated circuits, USB controllers, connectivity chips (Bluetooth, Wi-Fi, Zigbee) and memory chips.

The company has continued an expansion of its automotive portfolio, which will help enable manufacturers to bring high-tech automotive systems historically available only in luxury models to mainstream vehicles. Leveraging a wide range of differentiated products that includes microcontrollers, power management integrated circuits, memories and touch-sensing solutions, the portfolio enables value-added systems for Cypress’s top-tier automotive customers.

Cypress shareholders are paid a 2.8% dividend. Merrill Lynch has a $21 price objective, and that compares with the posted consensus price target of $18.25. The share price ended Thursday at $16.01.

ON Semiconductor

Aggressive accounts may want to look at this smaller cap play. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits and discrete chips into the automotive, communications, computing, consumer, industrial and medical applications. The company is in the midst of a transformation from a seller of commodity discrete chips into higher value added analog integrated circuits, both through organic growth and acquisitions.

The company is a leading sensor company, and the analysts noted the following in the report while also citing a delivered balance sheet and positive cash flow as big positives going forward:

The analysts view ON as an underappreciated way for investors to benefit from the emergence of ADAS and eventually Autonomous Driving. While the company is inherently levered (operationally and financially) and therefore subject to investor fears of cyclical volatility, many continue to see structural upside for the shares.

The $25 Merrill Lynch price target compares with the consensus target of $20.13. The shares were last seen trading at $20.08 apiece.

Marvell Technology

This company just made a bold $6 billion bid to buy Cavium. Marvell Technology Group Ltd. (NASDAQ: MRVL) is a fabless supplier of mixed signal and analog semiconductor products to a number of storage, computing and communication applications, including hard disk drives, personal computers, servers, Ethernet switches, printers and connectivity markets.

The Merrill Lynch team is very positive on the company’s purchase of Cavium, and they feel the deal adds significantly to the growth element for the stock. The addition helps to make Marvell solidly positioned in data center, cloud, enterprise, security and 5G.

Merrill Lynch has set its price objective at $28 a share. That compares with the posted consensus target of $27.33. The stock closed Thursday at $22.34 a share.

Microchip Technology

Microchip Technology Inc. (NASDAQ: MCHP) not only is a huge Internet of Things benefactor, but a leading provider of microcontroller, mixed-signal, analog and flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide.

The company offers microcontrollers, such as 8-bit, 16-bit and 32-bit microcontrollers under the PIC brand name and 16-bit dsPIC digital signal controllers, as well as provides microcontrollers for automotive networking, computing, lighting, power supplies, wireless communication and wireless audio applications.

Note that Microchip Technology is only owned by 6% of active managers, which is well below the 2011 peak of 12%.

Investors are paid a very solid 1.67% dividend. The Merrill Lynch price target for the stock is $110. The consensus price objective is lower at $106.63, and the stock was last seen at $86.99.

While the semiconductor industry bounced back some after the big selling, all these companies remain priced at levels that make sense. It is important to remember that these are more suited for risk-tolerant accounts and that volatility could remain in the sector the rest of the year.

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