Tuesday’s rally of the tech-heavy Nasdaq was huge, after it had slipped for the second time in the past week into correction territory, which is described as a decline of 10% or more. Surprisingly, one technology subsector has declined even more and may be offering aggressive investors a huge opportunity to buy some of the top companies.
A new BofA Securities research report focuses on semiconductors, which have been in the news recently as chip shortages have caused some issues in numerous industries, most notably in the automobile arena. The analysts point out that the Philadelphia Semiconductor Index (SOX) had fallen 15% from highs, which is very close to the average 20% sell-offs that have been produced annually since 2010.
With demand increasing, and the stocks at some of the best entry points in the past six months, six top companies are rated Buy in three specific chip categories, and all offer intriguing value for aggressive growth investors. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
NXP Semiconductors N.V. (NASDAQ: NXPI) is still considered a top play for investors looking for a chip stock with Internet of Things exposure. It became the fourth largest semiconductor company in the industry after it merged with Freescale in late 2015. It is also important to note that the combined company is the number one supplier in auto semiconductors with a 14% share, as well as the number one supplier in global microcontrollers and a dominant supplier in mobile payments.
NXP continues getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile phone charging, increased cellular data consumption and even LED lighting. With shares trading at a solid discount to peers, some Wall Street analysts are very positive on the faster earnings growth potential relative to its competition.
Many on Wall Street believe NXP has revenue drivers that are not broad-based and macro-driven, but rather company-specific product cycles developed by an engaged management team, as well as margin expansion drivers that are undervalued by investors. With improving trends in various end-markets, it is a top stock to own now.
Investors receive a 1.30% dividend. The BofA Securities price target for the shares is $220, and the Wall Street consensus target is $210. ’NXP Semiconductors stock rose over 7% on Tuesday to close at $183.82 a share.
ON Semiconductor Corp. (NASDAQ: ON) stock also should benefit from the increased demand from auto and EV companies. It is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits and discrete chips into 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 ICs through both organic growth and acquisitions.
BofA Securities turned around on the company recently and noted this:
Double upgrade from Underperform to Buy on confidence in long-term margin expansion; raising our price objective. Multiple levers (adjustments to mix, ramp of 300mm, fab sales) should drive gross margins to 43% and free-cash-flow margins to high-teens.
It raised its price target to $48 from $32 with that upgrade. The $45 consensus target for On Semiconductor stock is still well above the most recent close at $37.93, even after a gain of over 5% on Tuesday.