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Semiconductors: 2015 in Review; Where to Bet Your Chips in 2016


Editor's Pick: Originally Published Tuesday, Dec. 22.

It would seem "eat or be eaten" was the strategy of the year for semiconductor companies in 2015. Led by Apple (AAPL - Get Report) supplier Avago Technologies (AVGO - Get Report) , which paid $37 billion for chip giant Broadcom (BRCM - Get Report) -- creating a combined entity that was the world's third-largest wireless technology company by revenue -- companies with big bankrolls and and small growth prospects went shopping for growth engines that would have otherwise taken years to build.

It was likely Avago's deal-making that accelerated talks between rivals Intel (INTC - Get Report) (down 3.87% thus far in 2015) and Altera (ALTR) , and ultimately convinced them -- after weeks of rumors -- that their $16.7 billion merger was in their best interest. Will there be more deals in 2016? You can bet on it. Before we dive into some possibilities, let's take a look at where things stand today, and which stocks look like solid buys for long-term gains.

Although the Philadelphia Semiconductor Index  (SOX) (down 3.87% in 2015) may end year off its 2015 lows, it's still down some 9% over the past six months, against year-to-date declines of 1.83% for the S&P 500 (SPX) index. And the SOX has been a huge disappointment when compared its 2014 gains of almost 30%. Take a look at the chart. SOXX Year to Date Total Returns (Daily) Chart
SOXX Year to Date Total Returns (Daily) data by YCharts

The struggles of the SOX mirror the declines of some prominent names like Intel and Advanced Micro Devices (AMD) (down 8.24% in 2015). But few beaten-down chip stocks offer the appeal of Qualcomm (QCOM) . With its shares off about 36% in 2015, QCOM stock should be bought now as a possible bounce-back candidate.

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It's true, owing to struggles in its wireless chip business and being left out of Samsung's (SSNLF) Galaxy S6 phones, the San Diego-based semiconductor giant hasn't had a good year. But it does pay a strong 48-cent quarterly dividend that yields about 4% annually based on its current trading price in the neighborhood of $48.50. Qualcomm's yield is twice the 2% yield paid out by the average stock in the S&P 500 index. And based on fiscal 2016 consensus estimates of $4.18 a share, QCOM stock is trading at less than 12 times forward earnings, compared to the forward P/E of 17 the S&P 500. This makes QCOM, which has a consensus buy rating and an average analyst 12-month target of $60 -- around 24% above current levels -- a great buying opportunity today.

Another chip name to love in 2016 is Skyworks Solutions (SWKS) , which makes high performance analog chips that connect people, places and things. While its stock -- at around $78 a share -- has done well in 2015, up some 5%, the shares have fallen more than 30% since reaching their 52-week high of $112.88 in June. And I would put Skyworks at the top of the list at potential takeout targets in 2016.

Why? Aside from being a well-positioned player in the realm of the Internet of Things, Skyworks -- like Avago -- is key parts supplier to Apple -- its products are prominent within iPhones and iPads. So what's good for Apple is likely good for Skyworks, and with sales estimates for the iPhone 6 and 6 Plus for the quarter  ending in January at 75 million devices, it would seem Skyworks' stock has tons of runway left. And that doesn't even include its growth prospects in IoT.

From my vantage point, Skyworks would make a great target for Qualcomm, which has tons of cash (roughly $17 billion on its balance sheet) and slowing growth. Qualcomm should consider a deal for Skyworks to expand its product portfolio and better diversifying its wireless businesses.

Finally, there's Atmel (ATML) , which is an industry leader in touch controllers and sensors. Headquartered in San Jose, Calif., Atmel wants to revolutionize touch in non-traditional products, including automotive applications. Some of its key platforms include its latest maXTouch solution and its new XSense technology -- both used in various types of touch screens. And these products are seeing better-than-expected demand.

What's more, in 2015 Atmel initiated a 4-cent per share dividend -- the company's first cash dividend in its 30-year history. With ATML stock down 20% from the 52-week high it hit six months ago, now is a good time to place a long-term bet. Assuming Atmel can grow fiscal 2016 earnings at a 15% annual rate, these shares -- trading around $8.70 today -- can reach $10 to $11 in 2016.


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Author: Red

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