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In the last week of May, Avago Technologies Ltd. (Nasdaq: AVGO) agreed to pay $37 billion for Broadcom Corp. (Nasdaq: BRCM). And back in March, NXP Semiconductors NV (Nasdaq: NXPI) said it's making an $11.8 billion acquisition of Freescale Semiconductor Ltd. (NYSE: FSL).
All of which puts the semiconductor industry front and center in a new wave of high-tech mergers.
Through the end of May, global technology and telecom firms had already announced some $406 billion in mergers. That puts the consolidation wave at its highest level in a decade.
We'd love to take advantage of the profits that come out of these deals. (After all, Altera stock soared 16% this past month as rumors of the Intel deal percolated.) But trying to predict M&A activity is a risky proposition, especially for newer investors.
With that in mind, I want to tell you about a play where all these chip mergers are already delivering gains that in the past six months have beaten the overall market by nearly 11-fold.
But that's not the only catalyst…
A Catalyst "Twofer"
When it comes to semiconductor stocks, investors get two trends for the price of one.
The first is the chip industry's continued boom.
The Semiconductor Industry Association says global chip sales hit $83.1 billion in the first quarter, the latest period for full data. That's a 6% increase from the year-ago quarter, itself a boom period – and it means the chip industry is growing 12 times faster than the U.S. economy, which grew a scant 0.2% during the first quarter.
The reason for strong chip sales is simple – these devices are the brains behind the tech products we all need.
I don't know about you, but I can't do anything for very long without access to my smartphone, tablet, laptop, smartwatch, or Wi-Fi Internet access. Not to mention streaming music and video.
In addition to providing chips to these and other growing markets, chipmakers like Intel are also booming by reducing overhead as the cost of launching new chips has increased at least threefold in the last decade to roughly $100 million.
And they've joined the M&A game… big time…
Big Deal in the Tech Sector
As someone who's spent 34 years covering Silicon Valley tech companies, I have to note that Altera is Intel's biggest acquisition ever.
That's pretty impressive for a 46-year-old firm.
I think Altera is a great fit for Intel. The two firms already are de facto partners – Intel makes several chips that Altera has designed.
And the deal moves Silicon Valley's most storied firm more deeply into the market for data-center semiconductors as well as the Internet of Everything, two high-growth sectors where Altera is a leader.
Moreover, Avago Technologies' pickup of Broadcom is the largest semiconductor merger ever.
This was the second megadeal in just a little over a year for Avago. Early last May, Avago completed its $6.6 billion buyout of LSI Corp.
The NXP-Freescale merger is another deal I've been following closely.
Besides removing overhead from the combined firms, Freescale broadens NXP's lineup of chips that facilitate mobile payments at checkout counters to include sensors and microcontrollers for connected cars and wearable tech.
The One Tech Sector "Buy" to Rule Them All
With all this upside in the chip industry, you ought to consider buying a stake in SPDR S&P Semiconductor ETF (NYSE Arca: XSD).
XSD is the single most cost-effective way to profit from both of the catalysts I've been telling you about – the chip industry's growth and its merger wave.
I last mentioned XSD to you back on Dec. 11, 2014, as an investment that would demonstrate high-octane performance in 2015. Those of you who followed my recommendation have 19.1% gains in less than six months.
Compare that to a 1.7% return for the Standard & Poor's 500 Index over the same period. That's an 11-fold win over the broader market.
XSD is an exchange-traded fund (ETF) holding a wide range of chipmakers. With this one "Buy," we invest 48 firms covering every aspect of the chip industry – including both buyers and acquisition targets.
Take the Intel-Altera merger. XSD owns both stocks, with Altera ranked as its largest holding, accounting for 3.5% of the fund (Intel makes up about 2.5% of the fund).
The ETF also owns both Avago (2.7% of the fund) and Broadcom (2.9%). It doesn't own NXP, but it does own Freescale (2.4%).
Of course, there's more going on here than just a play on the semiconductor merger boom. XSD holds plenty of rapidly growing companies with great technology.
- Analog Devices Inc. (Nasdaq: ADI) specializes in converting analog data like light, sound, and temperature into digital signals. It also sells high-performance amplifiers and radio frequency (RF) chips for the wireless industry. ADI recently supplied several components for Luke, the most advanced prosthetic arm ever approved by the U.S. Food and Drug Administration. The stock has a $21 billion market cap and 30% operating margins.
- Qorvo Inc. (Nasdaq: QRVO) is a play on the mobile sector and holds the world's largest portfolio of RF chips. It's also a great investment in advanced sensors knowns as MEMS (microelectromechanical systems) that measure speed, acceleration, position, tilt angle and more. This company itself is the result of the chip industry's consolation. It was created by the 2014 merger of TriQuint Semiconductor Inc. and RF Micro Devices Inc.
- Cavium Inc. (Nasdaq: CAVM) is a Silicon Valley chipmaker that started out 14 years ago as a niche designer of network security processors. Today, it's a leading provider of cutting-edge microprocessors for enterprise, data centers, cloud computing, and both wired and wireless computer networks. It's a quintessential growth firm. Cavium has a nearly $4 billion market cap and has grown its sales at 21% annually over the past three years, meaning sales are on pace to double every 3.5 years.
Thus, XSD offers investors a robust portfolio of companies on the leading edge of the global tech industry.
That's why this ETF has such a strong track record over the last two years, gaining 68.9%.
And with the continued demand for semiconductors and the wave of M&A, XSD is set up to deliver a steady stream of profits.
In other words, you can use this one "Buy" to keep your portfolio in excellent shape over the long haul.
Repeat After Me: Microelectromechanical Systems… There are a few Silicon Valley innovations that are now "interlocking" and creating moneymaking opportunities unlike anything we've ever seen. The trouble for new investors is that so many of these new technologies are pretty complex. And what they don't know or understand can hurt them. So, here are four tech industry terms you'll need to know to maximize profits…
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.