Buy, Sell or Hold: Cypress Semiconductors Boasts a Strong Showing Since Dec. 14 Recommendation

By Horacio R. Marquez, Contributing Editor, Money Morning • May 10, 2010

Back on Dec. 14 of last year - as the market had "inexplicably" risen and investors were jumping ship - afraid that the market would correct - I issued a call to buying Cypress Semiconductors Corp. (Nasdaq: CY).

I mentioned back then that, at $10.40 per share, the stock was a steal and that several factors would propel it much higher.  Today, with the stock having rallied some 10%, we will review these reasons to analyze their validity moving forward:

• I noted that we were picking a semiconductor stock at the beginning of a strong tech cycle, and that semiconductors are typically the first in the tech sector to hit a recession and the first to get out of it.  Well, the U.S. Federal Reserve last week clearly singled out technology as an area of unusual strength in the U.S. economy.  And, as U.S. economic growth becomes more and more ingrained, it continues to validate my thesis that we are at the very inception of a strong tech cycle.

• We talked about Cypress semiconductors being the poster child of cyclicality and that margins would continue expanding.  The company's first-quarter earnings release revealed exactly that. Despite the poor performance of Palm Inc.'s (Nasdaq: PALM) Pre - which relies on a Cypress chip for its screen management - its Static Random Access Memory division saw 17% sales increases.  Revenue in the first quarter, which traditionally goes down, actually went up by 4%, which is very positive.  There was a 90% increase in revenue coming from chips used in handsets, a segment that I highlighted as a strong growth area in my December analysis.  This segment will continue to sharply increase.

• And with all the good news in sales, given the firm's operating margins expanded strongly, I had expected gross margins to grow to as much as 50% from 42% in the last quarter.  They actually hit 52.6%. Clearly, Cypress Semiconductors is a company on the move.  The company now has posted its first back-to-back quarters of operational gains in nearly two years.

• I said in December that stronger earnings would be the main catalyst for higher stock valuation. Cypress semiconductors not only delivered profits, but it again showed momentum towards faster growth of both sales and profit.  This allowed Cypress to handily beat analysts' estimates in January and April.

You see, this poorly understood company is actually a major innovator.  Internally, it has a venture capital firm mentality that fosters creativity.  In this way, it created SunPower Corp. (Nasdaq: SPWRA) and spun it off in 2008.  But Cypress' exclusive dependence on SunPower's earnings power is behind.  The company now is growing strongly in high-margin products like touch screen controller chips.

Its new PsoC (programmable system-on-chip) is a quantum leap over non-programmable chips used in gadgets. Also, its True Touch technology has gained acceptance by key handset manufacturers.  Another key new technology is its West Bridge system, which allows for faster downloads on mobile phones.  So when we think of Cypress, we increasingly think mobile, mobile, mobile!  And clearly, this is an area of very high growth in the market.

Our position on Cypress in the last two quarters has been validated by strong results.  Moving forward, the U.S. economy keeps accelerating with gains in retail sales and some incipient gains in employment.  The tech sector, in particular, is enjoying its own rebound due to the broadband wireless Internet revolution started by the Apple Inc. (Nasdaq: AAPL) iPhone.  This trend is gaining momentum, and Cypress is introducing new, high margin products that could gain major traction.

Since I believe that we are at the very beginning of a long new tech cycle, and that our investment in Cypress Semiconductors has been validated, I recommend investors stay long on the stock.  It currently enjoys very low price-to-earnings (P/E) and price-to-earnings-to-growth (PEG) ratios, and it has a lot of room to run before it becomes overvalued - even without any earnings growth.  I expect earnings growth to accelerate, which makes the potential gains for Cypress much larger.

Technically, the stock is in a clearly bullish mode, well above its 200, 50 and 20-day exponential moving averages. It did not budge much at all in the recent weakness, showing strong resiliency.  In addition to a clear message about tech from the Fed, offshore hedge funds have been flocking to tech.  So we have both strong fundamental and technical reasons to remain bullish on Cypress stock. 

Shares of Cypress Semiconductor on Friday fell 56 cents, or 4.69%, to close at $11.37. That's at the top end of its 52-week trading range of $6.86 a share and $11.96 a share.

Recommendation:  Investors who do not own Cypress Semiconductors Corp. (Nasdaq: CY) should buy it at market (**).  Investors that already own it should hold it and consider adding on any weakness.

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in Cypress Semiconductors Corp.

[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]

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