The Fed continues to raise interest rates in an effort to fight inflation, but may also cause a recession, cautions Mark Skousen, editor of Forecasts & Strategies.

In the first six months of 2022, the S&P 500 fell by 20%, its worst performance since 1970. We weathered the storm by minimizing our losses compared to the market in general.

My colleague Jim Woods, co-editor of Fast Money Alert, pointed out that in all the instances when the stock market has declined by 15% or more in the first half of the year, the S&P 500 enjoyed a solid positive return in the final six months of that same year. That bodes well for our portfolio.

My latest recommendation is the deeply undervalued computer chip company Alpha and Omega Semiconductor Inc. (AOSL). The stock initially fell after it was announced that outlook for the computer chip market had lost steam. But since then, the stock has rallied sharply and is now profitable.

Indeed, the stock has skyrocketed 40% in the past month. Investors finally realized how deeply undervalued it was. But it’s still selling for only 8.1 times forward earnings, a huge discount from the semiconductor industry (15.2).

Based in Sunnyvale, California, Alpha and Omega Semiconductor is a perfect way to take advantage of the computer chip market. AOSL is a chipmaker for use in smart phone chargers, battery packs, notebooks, desktop and servers, data centers, base stations, graphics card, game boxes, TVs, alternate current (AC) adapters, power supplies and tools, e-vehicles, UPS systems, solar inverters and industrial welding.

Its business looks strong, with sales growth accelerating 41% in 2021 to $761 million. The company went from losing $6.6 million in 2020 to a gain of $450 million in 2022. Profit margins exceed 60% and return on equity (ROE) is 70%.

The company has $323 million in cash and hardly any debt ($96 million). So far, the company does not pay a dividend, but it could in the future. 

Keep buying. AOSL reports on August 10 and is expecting a quarterly revenue of $190 million, up 7.2% from a year ago. As we look into the future, I’m bullish on the stock and think it has strong upside potential. In fact, my one-year target for AOSL is $58 a share.

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