Silicon Motion: Taiwanese Powerhouse

05/17/2016 10:00 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Our latest stock choice is a slightly conservative one, a Taiwanese fabless chip-maker that specializes in microcontrollers for flash memory, the solid-state storage medium for virtually every mobile device out there, explains Paul Goodwin, editor of Cabot Emerging Markets Investor.

Silicon Motion (SIMO) was founded in Silicon Valley in 1995, but it’s now a Taiwanese powerhouse with an especially strong relationship with South Korean tech manufacturers.

Silicon Motion is a global leader in designs for solid-state memory device controllers, buses and memory storage products. The company also offers systems-on-a-chip solutions for mobile TV and LTE mobile transceivers.

In addition to its in-house design innovations, Silicon Motion used the acquisition route to add enterprise-grade connectors for the Chinese data center market with its 2015 buyout of China-based Shannon Systems.

In addition, the company has made inroads in the German luxury car market with its FerriSSD memory system.

Its design and research expertise has kept revenue growing for years. And because the company doesn’t operate chip factories, its overhead is low.

The larger story buoying Silicon Motion’s stock is the widespread return of investors’ appetite for tech stocks, which have been out of favor for months.

SIMO has been in a long-term uptrend since the middle of 2013, but a three-month pullback in 2014 and another in 2015 made it just about impossible for growth investors to stick with it.

SIMO went flat last December, eventually falling from $34 as the month began to a floor of support at $27 in January.

A recovery to $34 at the beginning of March completed a cup-shaped pattern. Technically, this was the perfect setup for SIMO’s March–April rally.

SIMO is now trading in blue-sky territory, making new all-time highs in late March before correcting briefly to its 25-day moving average, then jumping ahead again.

The stock pays a dividend with a 1.5% annual yield and trades at a reasonable 19 P/E ratio. We recommend buying SIMO now.

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By Paul Goodwin, Editor of Cabot Emerging Markets Investor

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