This Tech Sector is Hotter Than the U.S. Stock Market

20 | By Michael A. Robinson

Noted tech researcher IDC says that global PC shipments plunged 14% in the first quarter.

That was almost double the 7.7% decline IDC had been expecting, and was also the biggest year-over-year free-fall since the market-intelligence firm started tracking PC shipments 20 years ago.

This wasn’t a one-time event, either: It marked the fourth straight quarter that worldwide PC shipments had fallen.

No wonder the pundits are talking about the “Death of the PC.”

After reading one of these high-tech eulogies, I’m betting that the last thing you want to do is to invest some of your carefully saved capital into any part of the semiconductor sector.

After all, those complex microchips are the “brains” of a computer: So if the PC sector is getting battered, it stands to reason that the chip sector would be getting thrashed, as well – meaning the best move is to stand clear of both.

Don’t make that mistake.

While PC stocks should be relegated to the tech-investor’s version of an isolation ward, semiconductor shares have been on a roll since the start of the year and will continue to be one of the best ways to generate big profits for some time to come.

If you buy the right ones, that is.

And today, I’m going to show you the best way to profit from this entire sector – by investing in this single stock.

Chip stocks have been on fire – so hot, in fact, that they’ve outperformed the overall U.S. stock market.

Through the end of May, the semi sector is up 20% – a return that’s actually 58% better than the 12.7% gain turned in by the Standard & Poor’s 500 during the same stretch.

The fact is that semiconductor sales have recovered strongly from a very tough 2012.

An industry trade group known as SEMI says North American semiconductor producers booked $1.17 billion in new orders in April. That represented a 6.4% improvement from the month before.

But here’s the really good news: That’s 63% better than the low of $719 million reported last November.

The industry’s “book-to-bill ratio” – a measure of whether the industry is expanding or contracting – came in at 1.08, meaning producers are taking in $108 in new orders for every $100 in old orders billed out.

And that’s bullish.

Behind every bullish move is a bullish catalyst. And I see one force in particular that’s fueling the semi sector’s strong rebound.

I’m talking, of course, about the “Mobile Wave,” a paradigm-shifting development that we’ve talked about a number of times in recent months.

We’re just a few years into this emerging market for hardware, software and services for today’s “on-the-go” crowd, but the Mobile Wave is already swamping the last great tech wave – the personal computer.

And when you look at the numbers, you can really see that there’s really never been anything like the explosive growth we’ve seen in smartphones and tablets.

Mobile devices are outselling PCs by a nearly 5-to1 ratio. And over the next three years, global spending on mobile devices will grow to $1.3 trillionor 35% of the world’s high-tech economy.

Every single one of those devices has one thing in common with PCs: They owe their life … their very ability to function … to the semiconductor.

Clearly, the semiconductor industry offers a lot of investment opportunities. In fact, you could spend hours researching the players and toiling to separate the winners from the losers in this hyper-competitive market.

But during my 30 years of tech investing, I’ve learned there’s a great way to play an entire sector by purchasing a single stock – by investing in one type of company that can act as a “proxy” for the entire industry.

And if you pick the “right” stock, the gains you’ll pocket will dwarf what you might’ve earned by investing in a basket of stocks, an ETF or even a tech mutual fund.

The company you want to look for is a supplier to the industry you’re interested in.

And you want to be sure to identify the “best-in-class” participant.

You see, by picking the “right” supplier – typically one that sells to most everyone in that market – you will profit no matter who wins the ultimate market-share battle.

The trick, of course, is to identify a “specialist” that offers something the entire industry simply must have.

Enter Cadence Design Systems Inc. (NasdaqGS: CDNS). The San Jose-based company is a leader in providing software and other services that help chipmakers design their products and put them through key reliability tests – before actual production begins.

For Cadence this is a long-term growth market.

And now the Mobile Wave is creating built-in demand for its services.

You see, smartphones and tablets keep getting more powerful – though their overall size (the product “footprint” in tech parlance) is staying the same.

That’s why your mobile device runs thousands of times faster than the computers NASA used for the Project Apollo moonshots of the late 1960s.

And it’s all because of miniaturization…

As you can imagine, packing more components onto chips the size of postage stamps adds more complexity – and dramatically multiplies the number of things that can go wrong.

So Cadence has developed software that can detect all the potential problems in the design and manufacture of highly complex semiconductors.

What’s great is that this fast-growing midcap firm isn’t limiting itself to this one market, however lucrative it may be. Cadence offers similar services to companies making such consumer electronics as digital cameras and video recorders, DVD players and game consoles.

Each of these areas is becoming more complex as consumers demand more sophisticated applications, meaning they’re looking for such products as game consoles and big-screen TVs that also can access the Web.

Cadence is also getting a lift from the move to advanced digital devices in new electronics for cars, medical equipment, and broadband computer network routers.

Add it all up and Cadence says it addresses a global electronics market worth a $2 trillion.

That’s a recipe for strong growth, and the $4.3 billion market cap company brings a strong balance sheet to the fight. Cadence has annual sales of about $1.3 billion. Its profit margin is a hefty 35% and its return on stockholders’ equity (ROE) is a staggering 65%.

Based on the firm’s financial estimates, I project profit growth to average 24% over the next three years to five years. At that rate, earnings per share (EPS) would double in about three years.

If the company’s current P/E ratio of about 15 stays the same, the stock could roughly double from its current $15.25 a share.

Job One here at Strategic Tech Investor is to ferret out stocks that give you a chance to double your money at a manageable level of risk. If we keep doing that, we’ll be able to turn $25,000 into $250,000 faster than you ever thought possible.

Cadence offers investors that kind of growth. And it underscores – yet again – the value of the Five Tech-Wealth-Investing Rules that I’ve shared with you over the last several months.

After all, we wouldn’t have found Cadence without Rule No. 2, which tells us to “separate the signal from the noise.”

That’s just what we’ve done here – ignoring “the noise” (the eulogies for the PC) to home in on the real signal for profits (the rebound in chip orders).

We’ll continue to put those strategies to good use … so we can keep putting winners in your hands.

20 Responses to This Tech Sector is Hotter Than the U.S. Stock Market

  1. Kenny says:

    Hi Michael , As a new subscriber with a 25k trading bank how much do you recommend for each trade

    Best regds

    Kenny W

    • morris says:

      Don’t invest more than 4% of your money in any one position. Use a trailing stop of 25%. This way you can never lose more than 1% of your portfolio on a single position.
      In your case $1,000 per stock. As your portfolio changes in value, the amount you invest should change.

      • Michael Robinson says:

        Hi Morris,

        It all depends on whether you are talking individual stocks, index funds and ETFs. Having said that, I recommend you keep any position in a stock to roughly 5% of your portfolio. I generally recommend a stop loss and a trailing stop at 20%.

        Hope that helps,


    • Michael Robinson says:

      Hi Joe,

      At this point we don’t have a sample newsletter to send. However, I am working on launching an exciting tech investing newsletter in the very near future and will let you know as soon as that happens. Thanks so much for your interest,


  2. DP says:


    Did you single out Cadence from Cadence, Mentor and Synopsys for a particular reason? All 3 compete for the same markets, and each one has its strengths. All are trading near their 52 week highs?


    • Michael Robinson says:

      Hi Dp,

      Thanks for posting a comment. Much appreciate. You know, I understand where you’re coming from in terms of cross checking stocks. Here’s the thing. I’m constantly screening and checking stocks so we I come across one that meets my criteria I tag it. By definition, if a stock makes it through my process, I’ve already checked it against a lot possibilities.

  3. John R says:

    Hello Michael, I was wondering about the drop in PC sales and the semiconductor market. This piece is spot on and good timing for me. Thanks

  4. Gary says:

    Growth of 25 percent or greater end up on ” investment business daily” top 50 eventually over long time.”That’s awesome”

    • Michael Robinson says:

      Hi Gary,

      Good call on the PEG. I do look at that a lot to get a sense of the growth ahead. After all, the best tech stocks go hand-in-hand with growth.



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