24/7 Wall St.

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.

Microchip Technology

This is a huge Internet of Things benefactor but shares have been battered recently. Microchip Technology Inc. (NASDAQ: MCHP) is 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 received a receipt of antitrust clearance in the United States for the acquisition of Microsemi and the deal closed in June. Most on Wall Street feel it is an outstanding addition but may take some time to fully integrate.

A huge point for potential investors is that Microchip shares are down 31.0% since the company reported earnings on August 9. In this time the valuation has decreased from 13.0 times consensus forward non-GAAP earnings per share to 10.1 times. This compares to the five-year peak P/E of 20.1 times and five-year trough P/E of 10.0 times for the shares. Clearly, the stock is cheap compared to the past.

Investors receive a 2.13% dividend. The $112 SunTrust price target compares with the $109.80 consensus price objective. The stock closed Tuesday at $69.15.

Monolithic Power Systems

This off-the-radar play could offer upside potential and is one of the top Small/MidCap picks 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 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.

Shareholders receive a 1.05% dividend. SunTrust has a price objective of $156. The consensus target is $158.63, and shares closed Tuesday at $118.30, up almost 4% on the day.

Nvidia

This stock remains one of the firm’s top picks in the chip arena. 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. It 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 stock is sensitive to risk-off in high-growth stocks, but new second-half products in gaming, artificial intelligence/data center can catalyze recovery. Overstated noise from crypto mining (offset by gaming strength) and autonomous car testing (immaterial for two years) has added volatility to the shares.

SunTrust has set its price target at $316. The consensus target is $298.27, and shares closed most recently at $245.83, up almost 5%.

These five top stocks could be exciting fourth-quarter portfolio additions. It is important to note that they are only suited for aggressive growth accounts that can stand price fluctuations and volatility. It may make sense to buy partial positions in front of the upcoming third-quarter results.