Newsletter Watch: Semiconductor turnarounds
“Many technology stocks have been in the doldrums for some time,” says George Putnam, publisher of The Turnaround Letter. As a result, he says, the makers of semiconductors, which are at the heart of most technology products, have been suffering as well.
“But the semiconductor stocks are notoriously cyclical, and when they come back, they could rebound with a vengeance,” say Putnam, a long-standing expert in distressed stocks and turnaround situations.
In this newsletter watch, the turnaround specialist looks at the semis, offering several low-priced, small-cap turnaround speculations. Readers should be mindful that as low-priced, small-cap turnarounds, these are high-risk situations and the usual caveats should be considered.
“There are signs that a rebound in semiconductors may be just beginning,” he says, pointing to Intel, which he calls the 600-pound gorilla of the group, as recently reporting improved results.
“The industry has suffered from a glut of older, lower-margin products, but that glut is finally being worked off. Moreover, new applications ranging from high definition television to a new generation of smart phones are creating demand for new, higher margin chips,” Putnam says. And while the stocks of some of the bigger players, like Intel, have already begun to trend upward, he says that a number of other semiconductor stocks are still trading at or near multi-year lows.
Conexant Systems, Inc. (Nasdaq: CNXT), he says, is a leading provider of semiconductor technology targeting all avenues of broadband communications, from DSL chipsets and digital set-top boxes to home-networking processors and game consoles.
“Over the last few years, the company has struggled with a troubled acquisition, an Asian market slowdown, price competitiveness and an inventory buildup,” Putnam says. “Conexant has made progress with many of these issues, and importantly, it has stayed on the cutting edge of technology developments. It will benefit from the rollout of HDTV as well as the push by telecom companies to deliver the ‘triple play’ of voice, video and data.”
Conexant has a market cap of $588 million. On Thursday, shares of Conexant closed at $1.37. Over the last 52 weeks, shares have ranged from $1.05 to $2.36.
Next, Putnam points to Ikanos Communications, Inc. (Nasdaq: IKAN), which develops programmable semiconductors that facilitate fast broadband services over existing copper telephone lines.
“Its advanced DSL technology is helping telephone companies compete with cable and other systems operators in making the final connection from their transmission networks to the home,” he says.
Most recently, he says that AT&T has agreed to use Ikanos chips in its fiber network.
“Ikanos has plenty of cash, and the stock is attractively valued,” Putnam says. Ikanos has a market cap of $160 million. Ikanos closed at $5.59 on Thursday. Shares of Ikanos have ranged between $5.25 and $11.47 over the last 52 weeks.
The turnaround specialist also sees opportunity with Mindspeed Technologies, Inc. (Nasdaq: MSPD), which develops semiconductor networking solutions for communications applications in enterprise, access, metropolitan and wide-area networks.
“Most OEMs use the company’s chip technology to build their communication equipment,” he says. “There is evidence of improving operating momentum, and the balance sheet is pretty clean.” Mindspeed has a market cap of approximately $200 million and closed at $1.68 on Thursday.
Also on his turnaround list is SigmaTel, Inc. (Nasdaq: SGTL), which he says previously benefited from being a preferred supplier for Apple’s iPod players.
“The stock had a good run into early 2005, but the subsequent loss of the Apple account sent the shares into a tailspin. But demand for the firm’s analog-intensive, mixed-signal semiconductors haven’t evaporated,” he says. SigmaTel has a market cap of just $93 million and closed on Thursday at $2.79. Over the last 52 weeks, shares have ranged from $2.49 and $6.01.
Finally, the advisor looks to Silicon Image, Inc. (Nasdaq: SIMG), which he believes is attractively positioned as a developer of semiconductor technology that is being used in the rollout of high-definition consumer products.
“High definition multimedia interface (HDMI) technology is increasingly being incorporated into a wide range of products in addition to television sets, including DVD players, PCs and set-top boxes,” says Putnam. “Margins and revenues will continue to grow as consumers demand newer digital products.” Silicon Image has a market cap of $476 million and on Thursday closed at $5.61. Shares of Silicon Image have been between $4.70 and $14.68 over the last 52 weeks.
