Cruel, cruel summer turns chips into bargains
Semiconductor stocks seem to always slump in this season and surge in the fall. The only real dilemma: do you bet on super-growth names or hunt for bargains?
By Jim Jubak
The calendar and the charts say this is the time to buy chip stocks.
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I'd divide chip stocks into two groups, each with different fundamental characteristics and very different risk/reward profiles. I'd call the first group supergrowth stocks and the second, bargain growth stocks.
I think we can all tick off some members of the supergrowth group. The names became familiar to investors during the momentum-driven market that stretched through 1999 and into 2000. Broadcom (BRCM, news, msgs), PMC-Sierra (PMCS, news, msgs), Applied Micro Circuits (AMCC, news, msgs) -- these are stocks with stunning estimated earnings-growth rates. Analysts project that Broadcom will grow earnings by 97% in 2000, PMC-Sierra by 122% and Applied Micro Circuits by 133% in the fiscal year that ends next March. And they have stunning price-to-earnings ratios to match. Broadcom sports a trailing 12-month multiple of 359, and Applied Micro Circuits trades at 411 times trailing earnings. PMC-Sierra seems a bargain at a P/E multiple of just 296.
It's not surprising that stocks in this group also turned in astonishing returns in 1999 -- Broadcom up 373% for the year, PMC-Sierra, 378% and Applied Micro Circuits, 608%. What has surprised me this year is how well these astonishingly expensive stocks have held up in the technology sell-off that started in March. From March 10 through Aug. 15, PMC-Sierra is down just 13%, Broadcom is down just 1%, and Applied Micro Circuits is actually up 10%. It's not that these stocks didn't fall during the technology bear market -- PMC-Sierra, for example, traded as low as $125.56 on April 13 and at $133.44 on May 23. It's just that they've recovered faster than most of the stocks in the sector.
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