After a few weeks of indiscriminate selling brought on by worry of higher interest rates this year, there are a lot of stocks trading on the cheap. That's especially the case in the tech sector where even some older, well-established, cash-generating businesses got sold off for no real good reason. If you like bargain stocks that can overcome inflation fears, this is a great place to start sorting through the rubble.
With that in mind, three Fool.com contributors think Micron Technology (MU -0.60%), Broadcom (AVGO 0.61%), and Kulicke & Soffa Industries (KLIC 1.21%) are a buy right now.
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This price-taking chipmaker would benefit from supply constraints and price inflation
Billy Duberstein (Micron): DRAM and NAND flash producer Micron had held up better than high-flying growth stocks from November through early January, but even this outperforming value stock cracked amid the big market sell-off over the past two weeks. Shares are currently down about 15% from recent highs as of this writing.
And yet, it appears the momentum in Micron's business is just taking off. The company delivered a strong earnings report at the end of December, and a recent report from Digitimes suggests DRAM and NAND prices are now rising again due to better-than-expected demand and supply constraints.
It's possible supply could be squeezed even more in the near future amid the ongoing chip shortage. Semiconductor equipment supplier ASML Holdings (ASML -1.03%) reported earnings recently, and management said demand for its products was overwhelming its capacity to make machines.
If memory producers like Micron and others aren't able to buy enough machines to produce more chips, they may not be able to fulfill the robust demand the world is seeing now as pandemic-fueled digital transformation accelerates chip demand. That could lead to higher memory prices and windfall profits for Micron this year. Management has already anticipated strong results, reiterating on its recent earnings conference call it expects record revenue and solid profitability this fiscal year, which ends in September.
Not only is Micron somewhat of an inflation hedge, specifically against a worsening chip shortage, but it's a very cheap stock too, especially by technology standards. Micron trades at just 13 times earnings today and about nine times this year's earnings estimates. The company also recently instituted a dividend. While the yield is small, it's a significant display of confidence in this cyclical business, indicating Micron's boom-and-bust past may moderate going forward. That could lead to a higher valuation multiple in the future as well.
Broadcom's cash cow is producing at record levels
Nicholas Rossolillo (Broadcom): Chip design giant Broadcom anchors a unique place in the semiconductor industry. It's not the household name of other semiconductor giants, yet the company's hardware is a basic staple in devices like smartphones, in the mobile and cable networks we rely on every day, and in constructing the data centers that power cloud computing services. As a result, Broadcom has been a steady growth investment for years.
More recently, enterprise-grade software has been added into the mix via a string of acquisitions, and now Broadcom often packages these tools together with the equipment it sells to its customers. In the recently completed 2021 fiscal year, software was only about one-quarter of total revenue, and it grew at a slower pace (up 7% year over year) than the semiconductor bread-and-butter (up 18%). However, it's been a highly profitable addition for Broadcom, one that should make for even more consistent financial results for years to come.
And speaking of financial results, Broadcom profit-generating ability is truly impressive. Free cash flow was $13.3 billion in fiscal 2021, a whopping 48.5% profit margin and a 15% increase in free cash flow generated in 2020. Broadcom's target is to return half of the previous year's free cash flow to shareholders via dividends, plus an additional cash return via share repurchases to sweeten the deal. A new repurchase program worth $10 billion was announced last quarter. After the recent sell-off, Broadcom's dividend alone is yielding nearly 3% per year, making this one of the best investment income stocks in the tech world.
Granted, Broadcom is not the fastest-growing name in the chip industry. But if you're looking for a deal on a big and stable stalwart of the economy, this stock is trading for just over 17 times trailing-12-month free cash flow. Broadcom stock could be a great anchor for your portfolio for good times and bad.
Don't forget this winner in the chip shortage crisis
Anders Bylund (Kulicke & Soffa Industries): Electronics manufacturing and microchip packaging expert Kulicke & Soffa Industries is one of those quiet industry veterans that never seems to get the respect it deserves.
The company benefits from the ongoing semiconductor manufacturing shortage as chipmakers scramble to beef up their manufacturing facilities. You can see that storyline play out in the company's financial results.
Kulicke & Soffa crushed Wall Street's expectations in each of the last four quarterly reports, including a 38% bottom-line surprise in the third quarter of fiscal 2021. In the most recent quarter, sales nearly tripled year over year while adjusted earnings increased by 520%.
Yet, the stock has fallen 13% amid the tech sector panic of the last month and trades at just 8.2 times trailing earnings. Kulicke & Soffa is one of the cheapest stocks in the semiconductor equipment industry, even though its earnings growth and profit margins are some of the strongest you'll find in that sector today. Oh, and don't forget about Kulicke & Soffa's dividend, which is the highest yield you'll find in this sector while consuming just 12% of the company's free cash flows last year. That's a first-rate dividend payout in my book.
It's only a matter of time until Mr. Market realizes how incredibly undervalued this stock is. Kulicke & Soffa looks like a no-brainer buy right now.
