In Friday's Private Briefing, we told you the semiconductor sector was one place you need to be in the New Year. And we promised to circle back with some recommendations for you to consider.
We're keeping that promise today.
Or, more accurately, we're starting to keep it.
After talking to our experts and reviewing several of the chip-stock plays that we've recommended here in Private Briefing, I found that I had a nice, diverse list – one with recommendations that should satisfy investors of every ilk.
Given the different types of semi stocks our experts came up with, I thought we'd break the list down into a couple of Private Briefing columns, which I promise we'll deliver over the next week.
The two we'll start with at first glance might appear very different. But the fact is that they're both high-risk/high-return picks that I got from our in-house tech expert: Radical Technology Profits Editor Michael Robinson.
"Bill, there are two intriguing possibilities here, and they're at opposite ends of the investment spectrum from one another," Michael told me. "The first is ARM Holdings PLC (Nasdaq ADR: ARMH), and the second is Advanced Micro Devices Inc. (NYSE: AMD). I say they're at opposite ends of the spectrum because ARM is a growth play that's promising but expensive on a valuation basis, while AMD is a low-priced turnaround play."
I asked for a rundown on each one.
"ARM is a British firm that has found the industry sweet spot – and therefore has a license to print money," Michael explained. "Rather than manufacture chips or micro-controllers, the company licenses its technology to hardware firms. To date, it has 600 licenses with more than 200 companies. Besides smartphones, ARM's products are in mobile-payment systems, auto infotainment centers and digital TVs. Trading at $38, ARM recently grew earnings by 31% and has about $500 million in net cash and no debt. It's very expensive on a Price/Earnings (P/E) ratio basis but it avoids all the overhead that comes with manufacturing."
But there's also a compelling story with AMD, the CPU-maker that has a marked ebb-and-flow history.
"I really feel that you don't want to overlook AMD as a turnaround stock," Michael told me. "The firm is still troubled but trades at $2.50 a share. The stock "based' in late October and in November before hitting bottom at $1.86 on a closing-price base. It now has moved above the 10-, 20- and 30-day EMAs and is trading above the 50-day line. This is a bottom-feeders dream – a low-priced stock whose chart right now looks very similar to how it did at the bottom back in 2009. If AMD shares just get back to half their one-year high of about $8.25, you're looking at roughly a double. But here's the thing to keep in mind: Although this looks to me like a run in the making, this kind of stock play is for high-risk/high-reward investors who have some risk capital they can afford to lose."
(For those of you not familiar with the term, "EMA" stands for "exponential moving average." It's a technical-analysis indicator that's similar to a regular moving average except that more weight is given to the latest price data. That allows the EMA to react more quickly to the most recent share-price changes than the conventional moving average.)
The investment-banking set on Wall Street has yet to buy into either of these "stories," meaning the consensus target prices aren't much higher than the current trading prices.
That's not necessarily a bad thing: If the stocks make a move, you know that the analysts will have to cover themselves by issuing upgrades and boosted target prices. That, of course, is something we love to see: Once we've made a recommendation and you've had the chance to establish a position, we're only too happy to see Wall Street get suddenly bullish on one of our picks. That, in turn, can attract a flood of liquidity, which will drive the prices higher – and put profits in your pocket.
I'll be back later in the week with some additional – but different – semiconductor stock plays.
See you tomorrow.
[Editor's Note: We recommend investors employ a 25% "trailing stop" on all holdings.]