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How We’ll Clean Up in “The Year of the Mega-Merger”

4 | By Michael A. Robinson

When we talked on Tuesday I told you about three tech leaders whose stocks are quickly rebounding – giving you three solid ways to profit following the market’s recent retreat.

I also promised to reveal a fourth investment that could add to your net worth over the long haul. Today I’m going to make good on that promise.

This investment takes advantage of one of the biggest trends in tech right now – the rapid consolidation of the semiconductor industry.

In fact, a new Dealogic report says that chip firms have announced $100.6 billion in mergers and acquisitions (M&As) so far this year – more than triple the $37.7 billion for all of 2014. And we’ve still two months to go in 2015.

But there’s much more to this story than just dollar volume.

A very important facet of these deals has gone largely unnoticed.

Today I’ll show you a great way to play this historic chip M&A boom using an investment you’ll want to own for the long haul.

And I’ll also tell what that “secret” detail is… 

The “Secret” Story

According to Dealogic, last year saw 369 M&A deals. This year the number of transactions has dipped about 25% to 276.

While there are fewer deals this year, if you only focus on the raw number of deals, you’ll miss the real story: the sheer size of many of this year’s M&A deals.

In fact, what’s going on is so profound that I believe that, for the semiconductor industry at least, 2015 will go down as “Year of the Mega-Merger.”

Last year the average chip M&A deal booked a value of $102 million, while this year the average deal is more than three times as large – $364.5 million.

And IC Insights reports that in the first half of this year alone, the average deal was about six times larger than the average deal size over the period 2010-2014.

And even those comparisons understate the true scale of things. Take a look at a sample of some recent M&As.

On Oct. 21, disk-drive maker Western Digital Corp. (Nasdaq: WDC) agreed to buy SanDisk Corp. (Nasdaq: SNDK) for about $19 billion in cash and stock. SanDisk specializes in chips used to store computer data.

That very same day, Lam Research Corp. (Nasdaq: LRCX) announced a deal to buy KLA-Tencor Corp. (Nasdaq: KLAC) for $10.6 billion. Both firms make equipment used to produce semiconductors.

Earlier this year, global chip leader Intel Corp. (Nasdaq: INTC) agreed to buy Altera Corp. (Nasdaq: ALTR) in a deal worth some $16.7 billion.

Around that same time, the industry saw the largest deal so far this year when Avago Technologies Ltd. (Nasdaq: AVGO) said it’s buying rival Broadcom Corp. (Nasdaq: BRCM) in a deal valued at $37 billion in cash and stock.

What’s Driving the Merger Boom

Industry analysts say three major factors are at play here.

First, the cost of producing a new line of semiconductors has risen more than 230%, from around $30 million a decade ago to roughly $100 million today. So, chip firms need to spread that out over larger production runs. The economies of scale that go along with mergers make that possible.

Second, established chip firms that had focused on PCs and related sales can use mergers to enter such growth markets as cloud computing, the wireless ecosystem, connected cars and the Internet of Everything.

Third, after several quarters of strong growth, overall chip sales have slowed recently because of lagging economies in Europe and Japan.

The Semiconductor Industry Association (SIA) says global chip sales for the second quarter, the last period for full data, hit $84 billion, a record amount. Yet, the industry posted only a 1% yearly sales gain for the period.

But the good news for us is the fact that the growth markets in the United States and China remain vibrant for chip firms. SIA says the Americas saw a 5.6% sales gain in the period while China registered a 7.8% increase.

The result is that chipmakers are merging so they can take advantage of new growth opportunities and the higher profit margins that accrue with more output at lower overhead.

How You’ll Profit

I believe SPDR S&P Semiconductor ETF (NYSE: XSD) is the single most cost-effective way to profit from the chip industry’s M&A wave and the forces behind it.

This is an exchange-traded fund with roughly 40 stocks in its portfolio. So the odds are good that you’ll get a piece of both corporate buyers and sellers.

Take the Intel-Altera merger. XSD holds both stocks, and they are roughly equally weighted within the fund at about 2.4% each. XSD also owns both Avago and Broadcom, each accounting for about 2% of the fund.

Now then, I last recommended XSD back on June 5 – and this investment couldn’t avoid the overall market’s summer sell-off.

However, it began rebounding along with the Nasdaq Composite Index on Aug. 25 – and has regained 17%. As a result, it’s now up 4.6% for the year, compared with the 1.6% decline for the S&P 500 Index.

Beating the S&P by 200%

Remember, there’s more going on here than just a play on the semiconductor merger boom. XSD holds a number of stocks that have great technology and lots of upside ahead.

Take a look…

  • OmniVision Technologies Inc. (Nasdaq: OVTI) is a small-cap firm that ranks as a world leader in complementary metal-oxide-semiconductors, known as CMOS image sensors. NASA is tapping OmniVision’s technology to help robots on the International Space Station better work with astronauts. OmniVision also sells sensors for wireless devices and those that that recognize gesture, eye movements and biometrics.
  • Cirrus Logic Inc. (Nasdaq: CRUS) is something of a turnaround stock for the fund. Cirrus had recently endured several quarters of weak sales and less than stellar profit results. But all that has changed as the company has found much wider use for its advanced audio chips. Indeed, Apple Inc. (Nasdaq: AAPL) uses Cirrus’ chips in its iconic iPhone. Cirrus Logic’s analog and mixed-signal audio converters and processors also are used in consumer electronics and in-dash infotainment centers for automobiles.
  • Cavium Inc. (Nasdaq: CAVM) is a Silicon Valley chipmaker that started out 14 years ago as a niche designer of network security processors. Today, the award-winning firm has branched out to become a leading provider of cutting-edge chips for data centers, cloud computing and both wired and wireless computer networks. Cavium counts Cisco Systems Inc. (Nasdaq: CSCO), International Business Machines Corp. (NYSE: IBM) and Qualcomm Inc. (Nasdaq: QCOM) as clients.
  • Qorvo Inc. (Nasdaq: QRVO) is another play on the mobile sector, and it holds the world’s largest portfolio of radio frequency chips. But it’s also a great way to invest in advanced sensors knowns as MEMS (microelectromechanical systems) that enable devices to measure and track speed, acceleration, position, tilt angle and other things. This company is itself a product of the chip industry’s consolation. It was created by the 2014 merger of TriQuint Semiconductor Inc. and RF Micro Devices Inc.

The Bottom Line

With XSD you have an investment that targets several tech sectors and is perfectly positioned to ride the current record-breaking M&A boom.

And XSD recently became even more of a bargain. Last month, the fund split 2-to-1 and now trades at just $41.50.

Over the last two years, it’s posted a 46% gain. That’s just shy of three times those of the S&P 500 over the period.

Thus, XSD is going to continue that level of outperformance as “The Year of the Mega-Merger” draws to a close.

That makes it a great foundational play that you can count on over the long haul to keeping boosting the value of your portfolio.

P.S. I hope you all are Liking and Following me at Facebook and Twitter. We’ve got a great community of friends, colleagues and readers there who are eager to make big money in tech stocks – today.

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4 Responses to How We’ll Clean Up in “The Year of the Mega-Merger”

  1. Brian Abrahams says:

    Michael, I read all your material with great interest. I am still very heavily invested in one of your past highly recommended stocks of which you make no mention or even bother to comment on. Have your views changed on AMBA, or is it worthwhile being patient while it continually drifts even lower?
    I look forward to your reply,
    Thanks,
    Brian A

    • Tony P. says:

      Michael, Relative to Brian A’s comment’s on AMBA, I also share his concern. I am a member of your Million Dollar Portfolio which is doing quite well except for AMBA. Since AMBA is one of your seven foundational stocks, are you still bullish on this stock? If you are, I’m happy to ride the train with you. I think part of the problem with the Million Dollar Portfolio is the relative lack of attention it seems to get in all of your alerts and directives. Other than the original report on the program and directions on how to set up the Portfolio, there has not been much ,if any, attention to that Portfolio per se. I was under the impression that this was a pet project of yours and all of us who have confidence in you and this Portfolio would really benefit from your close attention to this project. Perhaps, if we had more frequent updates on the Portfolio and it’s progress toward it’s ultimate goal, we members wouldn’t have these concerns, like AMBA. Am I off base here?

      Thanks,

      Tony P.

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