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The One “Buy” to Make to Profit From Semiconductor Mergers

7 | By Michael A. Robinson

On Monday, global chip leader Intel Corp. (Nasdaq: INTC) said it’s buying Altera Corp. (Nasdaq: ALTR) in a deal worth $16.7 billion.

Last week, Avago Technologies Ltd. (Nasdaq: AVGO) agreed to pay $37 billion for Broadcom Corp. (Nasdaq: BRCM). And back in March, NXP Semiconductors NV (Nasdaq: NXPI) said it’s making an $11.8 billion acquisition of Freescale Semiconductor Ltd. (NYSE: FSL).

All of which puts the semiconductor industry front and center in a new wave of high-tech mergers.

Through the end of May, global technology and telecom firms had already announced some $406 billion in mergers. That puts the consolidation wave is at its highest level in a decade.

We’d love to take advantage of the profits that come out of these deals. (After all, Altera stock has soared 16% over the past month as rumors of the Intel deal percolated.) But trying to predict M&A activity is a risky proposition, especially for newer investors.

With that in mind, I want to tell you about a play where all these chip mergers are already delivering gains that in the past six months have beaten the overall market by nearly 11-fold.

But that’s not the only catalyst…

A Catalyst “Twofer”

You know the importance of Rule No. 3 of Your Tech Wealth Blueprint. That rule says to “Ride the unstoppable trends.”

When it comes to semiconductor stocks, investors get two trends for the price of one.

The first is the chip industry’s continued boom.

The Semiconductor Industry Association says global chip sales hit $83.1 billion in the first quarter, the latest period for full data. That’s up 6% increase from the year-ago quarter, itself a boom period – and it means the chip industry is growing12 times fasterthan the U.S. economy, which grew a scant 0.2% during the first quarter.

The reason for strong chip sales is simple – these devices are the brains behind the tech products we all need.

I don’t know about you, but I can’t do anything for very long without access to my smartphone, tablet, laptop, smartwatch or Wi-Fi Internet access. Not to mention streaming music and video.

In addition to providing chips to these and other growing markets, chipmakers like Intel are also booming by reducing overhead as the cost of launching new chips has increased at least threefold in the last decade to roughly $100 million.

And they’ve joined the M&A game… big time.

Big Deal

As someone who’s spent 34 years covering Silicon Valley tech companies, I have to note that Altera is Intel’s biggest acquisition ever.

That’s pretty impressive for a 46-year-old firm.

I think Altera is a great fit for Intel. The two firms already are de facto partners – Intel makes several chips that Altera has designed.

And the deal moves Silicon Valley’s most storied firm more deeply into the market for data-center semiconductors as well as the Internet of Everything, two high-growth sectors where Altera is a leader.

Moreover, Avago Technologies’ pickup of Broadcom is the largest semiconductor merger ever.

This was the second megadeal in just a little over a year for Avago. Early last May, Avago completed its $6.6 billion buyout of LSI Corp.

The NXPFreescale merger is another deal I’ve been following closely.

Besides removing overhead from the combined firms, Freescale broadens NXP’s lineup of chips that facilitate mobile payments at checkout counters to include sensors and microcontrollers for connected cars and wearable tech.

The One “Buy”

With all this upside in the chip industry, you ought to consider buying a stake in SPDR S&P Semiconductor ETF (NYSE: XSD).

XSD is the single-most cost-effective way to profit from both of the catalysts I’ve been telling you about – the chip industry’s growth and its merger wave.

I last mentioned XSD to you back on Dec. 10 as an investment that would demonstrate high-octane performance in 2015. Those of you who followed my recommendation have 19.1% gains in less than six months

Compare that to a 1.7% return for the Standard & Poor’s 500 Index over the same period. That’s an 11-fold win over the broader market.

XSD is an exchange-traded fund (ETF) holding a wide range of chipmakers. With this one “Buy,” we invest 48 firms covering every aspect of the chip industry – including both buyers and acquisition targets.

Take the Intel-Altera merger. XSD owns both stocks, with Altera ranked as its largest holding, accounting for 3.5% of the fund (Intel makes up about 2.5% of the fund).

The ETF also owns both Avago (2.7% of the fund) and Broadcom (2.9%). It doesn’t own NXP, but it does own Freescale (2.4%).

Of course, there’s more going on here than just a play on the semiconductor merger boom. XSD holds plenty of rapidly growing companies with great technology.

  • Analog Devices Inc. (Nasdaq: ADI) specializes in converting analog data like light, sound and temperature into digital signals. It also sells high-performance amplifiers and radio frequency (RF) chips for the wireless industry. ADI recently supplied several components for Luke, the most advanced prosthetic arm ever approved by the U.S. Food and Drug Administration. The stock has a $21 billion market cap and 30% operating margins.
  • Qorvo Inc. (Nasdaq: QRVO) is a play on the mobile sector and holds the world’s largest portfolio of RF chips. It’s also a great investment in advanced sensors knowns as MEMS (microelectromechanical systems) that measure speed, acceleration, position, tilt angle and more. This company itself is the result of the chip industry’s consolation. It was created by the 2014 merger of TriQuint Semiconductor Inc. and RF Micro Devices Inc.
  • Cavium, Inc. (Nasdaq: CAVM) is a Silicon Valley chipmaker that started out 14 years ago as a niche designer of network security processors. Today, it’s a leading provider of cutting-edge microprocessors for enterprise, data centers, cloud computing, and both wired and wireless computer networks. It’s a quintessential growth firm. Cavium has a nearly $4 billion market cap and has grown its sales at 21% annually over the past three years, meaning sales are on pace to double every 3.5 years.

Thus, XSD offers investors a robust portfolio of companies on the leading edge of the global tech ecosystem.

That’s why this ETF – which opened this morning at $91.37, giving it a market cap of $215.6 million – has such a strong track record over the last two years, gaining 68.9%.

And with the continued demand for semiconductors and the wave of M&A, XSD is set up to deliver a steady stream of profits.

In other words, you can use this one “Buy” to keep your portfolio in excellent shape over the long haul.

P.S. I’m putting together a new Strategic Tech Investor report answering all your best technology investing questions. Do you have an investment or technology question you need answered? If so, post your questions in the comment box below. Look for the answers next week.

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7 Responses to The One “Buy” to Make to Profit From Semiconductor Mergers

  1. akoo says:

    how do you feel about XLK etf?
    my money is on this one. have i made the right decision or do i switch to XSD?

    thank you.
    akoo

  2. Dan Jones says:

    One of the biggest M&As to me would be QRVO and SWKS. Not sure it would make sense from a viewpoint of reinforcing weaknesses and amplifying strengrths as far as customer needs, but what a behemoth it would be.

    Then on top of that bring in Resonant.

  3. Rob says:

    What’s in store for INVN? It lost a lot of ground due to margin pressure from sales to Apple. How ddoes it get its growth back?

  4. Jim Laitner says:

    I have been looking for the best play in adding an interest in graphene technology. Recently, I owned shares of stock in GrafTech Intl (GTI) until a decision was announced by Brookfield Asset Management to acquire the company and subsequently de-list it from the NYSE. With all the possible applications of graphene is there one or two other other options you expect will significantly drive the technology forward?

  5. Chris C says:

    Micheal, I bought a decent size position in ON based on your recommendation that it is a good M&A candidate. The share price appreciation thus far hasn’t been great but not awful either. Do you still feel this is a good M&A stock and if it takes a while for an acquisition to actually happen do you see an ascending price trend that would justify holding the stock for say over a year?

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