This article is part of our Rising Star Portfolios series.

Investors looking for growth stocks have to feel the sweat starting to clam up on their hands. It's not that they haven't been rewarded well lately, but things are starting to feel a bit, bubbly. As my colleague Eric Jhonsa pointed out in his article "Does the Market Have a New Nifty 50?," investors desperate to find growth in a stagnant economy have crowded into a wide swath of stocks with strong growth potential, especially in fields like cloud computing.

Just take a look at this group of recent highfliers. While they share some commonalities (an association with cloud computing or e-commerce), the overarching theme is they're all recent growth stories and follow an escalating trend.


1-Year Return

Current P/E

F5 Networks






VMware (NYSE: VMW)






Baidu (Nasdaq: BIDU)



Source: Yahoo! Finance.

The worst part of the run-up is that most of these stocks now trade at nosebleed levels, P/Es are trading near or above triple digits in most cases, and even from a cash flow perspective, the multiples stay pretty rich.

Should investors looking for growth at a reasonable price pack up, fly down to Mexico, and sip on margaritas while waiting for valuations to come down? Though that sounds mighty fine, I'd hold up on the travel plans. Some growth areas have become overheated thanks to broader concerns across the semiconductor industry, but one continuing trend -- the growth of smartphones -- is presenting fantastic opportunities. Chief among these is audio products whiz kid Cirrus Logic (Nasdaq: CRUS).

Cirrus what?
Cirrus Logic is a semiconductor company that has historically served two major end markets: energy and audio products. While the company aims for a 50/50 revenue split between these segments, booming demand for its audio chips has led to that segment now comprising 70% of its sales.

Cirrus is selective in the niches it targets. Being a small player, offering a full line of audio products against a larger rival like Texas Instruments (NYSE: TXN) -- which boasts massive scale and a huge sales staff adept at cross-selling thousands of components -- would be a death wish. Instead, Cirrus targets more customized, complex, high-end audio chips. These high-end chips can offer better audio quality, a smaller size, and superior battery life to the gadgets they're in.

That's a great position to have leadership in, because if there's one thing that small and power-hungry smartphones crave, it's power savings and smaller chips. Take, for example, Cirrus' relationship with Apple (Nasdaq: AAPL), which has to be considered one of the company's greatest success stories.

Apple's a company of uncompromising vision and quality when it comes to its products. Cirrus secured a single design win with the company in 2005, but thanks to the audio quality and power improvements that its components offer, Apple has expanded Cirrus' products across its whole lineup. That kind of customer consolidation can be scary, but it also speaks to the quality of Cirrus' designs and expertise.

Why I'm buying
Here are several of the key reasons why I like Cirrus Logic as an investment:

  • Customized focus: A level of product customization in the semiconductor world is hardly unique; however, Cirrus Logic takes extra steps to avoid getting into the race-to-the-bottom pricing wars seen in the more commoditized areas of audio products.
  • Great valuation relative to growth prospects: Remember those sky-high P/E levels you saw at the top of the article? Well, be relieved that Cirrus Logic trades at just 11 times trailing earnings, 9 after netting out cash. Other companies benefiting from the smartphone boom like TriQuint (Nasdaq: TQNT) and Skyworks (Nasdaq: SWKS) also have well-capitalized balance sheets and should be winners of the smartphone shift, but they trade at steeper multiples. It's hard to top Cirrus' mix of established products, new growth areas for upside, and very reasonable valuation.
  • Excellent end markets: Aside from wins in smartphones and new media-centric tablets, Cirrus also has strong design wins in varying smart-grid technologies. Key smart-grid customers trade at multiples above 40 times, so once again there's an opportunity to get exposure to a key growth market at a cheaper value than seen in end customers.
  • Reliable legacy products: While quite a bit of focus is put on Cirrus' growth areas, it also has established high-margin legacy products across the audio and energy markets. In energy, for example, while smart-grid products are still ramping up, older seismic and metering products bring in a reliable stream that forms a majority of the segment's current revenue.
  • Focused management: The problem with buying component companies to play a trend like smartphones is that while the company may have some nice design wins, it's hard to understand its focus. Cirrus is very upfront with a differentiated strategy and puts a focus on a unique work culture that keeps its design experts happy and motivated.
  • A great balance sheet and no tax man to worry about: In addition to nearly $174 million in cash on its balance sheet, the company has $460 million in net operating losses, which assures that the federal tax man won't come calling for a long time.
  • Big drop, big opportunity: Cirrus recently issued guidance that pointed to a sequential revenue decline this quarter. Investors, skittish over any sign of semiconductor weakness, bailed out of the stock, sending shares down 20% since earnings. However, after posting outstanding 23% sequential gains last quarter (well ahead of just about any semiconductor company), the company was due for a breather. I don't think the light quarter-over-quarter weakness affects the long-term rationale for buying the company, and I see the drop as an opportunity to get into Cirrus on the cheap.

Why I'd sell
The greatest risk to Cirrus Logic is also the source of much of its recent strength: its close relationship with Apple. Make no mistake, while Apple might have that distinguishing laser-like focus on quality, it's fighting for every penny it can from suppliers. While I'm encouraged by Cirrus' rapid expansion across Apple's product lines, if the company were to lose its contracts with Apple, the blow to their stock price would be large. Last quarter, Apple contributed about 44% of Cirrus' revenue alone, up from 34% in the previous quarter. Any way you slice it, Apple's an integral part of the Cirrus growth story.

My Foolish bottom line
There's a lot more to be said about Cirrus Logic, and I'll continue exploring the company in the coming weeks. If you're looking for more information on the company, keep checking in on my Rising Stars portfolio in the coming weeks as I look further into its audio and energy product lines. Also make sure to read my recent interview with Cirrus CEO Jason Rhode.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).