Two Buys to Beat the Paranoia

08/10/2010 1:00 pm EST


James Oberweis

President, Oberweis Asset Management, Inc.

James Oberweis, editor of The Oberweis Report, says Wall Street hates semiconductor stocks, but they’re growing nicely and trading at some of their lowest multiples in years.

Paranoia is indeed pervasive in the market today.

There’s no place where that paranoia runs deeper right now than in semiconductor stocks. Company after company has beaten analysts’ earnings estimates this quarter, only to be greeted in the stock market with a big fat yawn.

Even though [the semiconductor industry is] among the few that have realized significant growth, nobody cares. They are cyclical businesses, the analysts’ shtick goes, and tomorrow will surely be worse than today.

So, we have been wondering if maybe—just maybe—the pessimism might prove overdone.
Very low stock valuations reflect much of the risk already. We are hearing continued confidence for growth in the near term from [chief executive officers] in the field.

Many small-cap names in the group will experience growth of 50-75% this year and carry valuations of only ten times forward earnings. Sure, growth won’t always be as strong as it is today, but valuations won’t always be this cheap either.

Within semiconductor capital equipment, Ultra Clean Holdings (Nasdaq: UCTT) [is one of] our favorites. [It’s] a leading developer and supplier of critical subsystems, primarily for the semiconductor capital equipment industry.

The company develops, designs, and manufactures subsystems which are highly specialized and tailored to specific steps in the semiconductor manufacturing process, as well as the manufacturing processes in other addressed industries.

Customers are primarily original equipment manufacturers (OEMs) [such as] Applied Materials (Nasdaq: AMAT), Intuitive Surgical (Nasdaq: ISRG), and Lam Research (Nasdaq: LRCX).

[Ultraclean] provides its customers complete subsystem solutions that combine their expertise in design, test, component characterization, and highly flexible manufacturing operations to help clients drive down total manufacturing costs.

In the company’s latest reported second quarter, sales increased approximately 356% from the second quarter of last year, [and UCTT] reported earnings per share of 25 cents in the latest reported second quarter, versus a loss in the same quarter of last year. (It closed around $11 Monday. Oberweis’s clients owned shares—Editor.)

Monolithic Power Systems (Nasdaq: MPWR) develops analog and mixed signal chips for lighting displays. The company combines advanced process technology with experienced analog designers to produce high-performance power-management integrated circuits (ICs). Monolithic’s products are used extensively in computing and network communications products, flat-panel TVs, set-top boxes, and a wide variety of consumer and portable electronics products.

Growth is being driven by semiconductor design wins, which numbered 230 in 2009, up 52% [from] 2008; about 50% of last quarter’s revenue was derived from products introduced since the first quarter of 2008.

In the company’s latest reported second quarter, sales increased approximately 36% to $55.7 million from the second quarter of last year, [while earnings per share rose to 31 cents] versus 17 cents in the same quarter of last year.  (The stock closed above $18 Monday, and Oberweis clients own shares—Editor.)

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