SunTrust Stays Very Cautious on Semiconductors: Just 5 to Buy Now

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Monolithic Power Systems

This off-the-radar play that could be offering continued upside potential is the top small/midcap pick for 2018 at SunTrust. Monolithic Power Systems Inc. (NASDAQ: MPWR) designs, develops and markets integrated power semiconductor solutions and power delivery architectures for consumer, industrial, computing and storage, and communications market segments.

The company offers direct current (DC) to DC converter integrated circuits (ICs) used to convert and control voltages of various electronic systems, such as portable electronic devices, wireless LAN access points, computers, monitors, automobiles and medical equipment.

It also provides lighting control ICs for backlighting that are used in systems, which provide the light source for LCD panels in notebook computers, monitors, car navigation systems and televisions, as well as for general illumination applications. In addition, it offers alternating current (AC)/DC offline solutions for lighting illumination applications and AC/DC power conversion solutions for various end products that plug into a wall outlet.

The analysts said this in the report:

We believe the company will generate a multi-year 20% sales compounded annual growth rate which, combined with expected margin expansion from new products and operating leverage, should deliver high 20’s% EPS growth.

Shareholders are paid a small 1% dividend. The SunTrust price objective is $135, and that compares with the consensus target of $129. The shares ended trading on Tuesday at $119.01.

Nvidia

This company has reported strong earnings over the past two years and remains the top large-cap pick at SunTrust. Nvidia Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.

Nvidia is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.

The SunTrust team has stayed bullish on this stock for some time, and noted this in the report:

We believe NVIDIA will outperform owing to revenue and earnings per share upside potential across most segments (especially Datacenter for Artificial Intelligence applications) and a sustained higher price to earnings owing to the scarcity premium for structural growth in large-cap semis. Our price target is based on 36x (12x discount to high-growth technology company peers) our calendar year 2020 EPS, discounted back one year.

Investors in Nvidia are paid a small 0.28% dividend. SunTrust has set its price target at $305. The consensus price target was last seen at $249.58, and the shares closed Tuesday’s trading at $221.20.

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The market and demand for chips are not going away. The rapid growth will slow, so it makes sense to stick with companies that are involved in the business of tomorrow, rather than a commodity type business that can stress average selling prices.