SunTrust Says Semiconductor Cycle Slowing: Just 5 Stocks to Buy Now

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For the past couple of years, owning the chip stocks has been an easy ride for aggressive growth investors. Exponential growth in all areas where semiconductors are used seemingly happened every quarter, and the segment outperformed in a big way. However, semiconductors are also highly cyclical, with many of the top companies nearing a five-year forward price-to-earnings (P/E) valuation that is very pricey.

Like many of the top companies we cover at 24/7 Wall St., SunTrust is extremely cautious in their sector coverage, but with that in mind, they also see tremendous growth ahead for semiconductors in certain areas.

A current SunTrust research report noted this:

Consumer sentiment momentum (our proprietary 5-month leading indicator for semi industry growth) began 2018 in negative territory, and has oscillated between negative and positive reads throughout this year. Today, the macro indicator surprised to the downside. We believe we’re in a fading growth part of the cycle, where we think structural growers should do best. We also like merger/cost reducers.

Five stocks were highlighted by the SunTrust, and all are still rated Buy at the firm.

Analog Devices

This stock could very well benefit from an increase in information technology and 5G spending, and the company does a sizable portion of its business with Apple. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

Last year the company introduced a highly integrated polyphase analog front end with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

Investors receive a 1.92% dividend. The SunTrust price target for the stock is $118, and the Wall Street consensus target is $107.85. The stock closed Tuesday’s trading at $85.76 a share.

Broadcom

This company has been on fire over the past year and remains a top pick across Wall Street. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its 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.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand still in play for the company.

In addition, the stock is underowned compared to peers, and the 40% iPhone content growth, combined with the closure of the Brocade purchase, which the analysts feel is accretive, are very positive catalysts. The analysts also feel dividend growth is possible.

Broadcom investors now receive a 3% dividend. SunTrust has a $338 price target, while the consensus target is $288.33. Shares closed Tuesday at $238.32.