In a private speech to the Financial Planning Association, legendary Vanguard Founder and former CEO John Bogle made an observation that’s absolutely critical to understanding where the best stock returns come from -- and how to find the next great stock to buy.

He told the assembled guests that only three things drive investor returns:

  • Dividends
  • Earnings growth
  • Changes in valuation

That’s all it comes down to. Historically, stocks have returned 9.6% per year on average -- 5%, 4.5%, and 0.1% from dividends, earnings growth, and valuation changes, respectively. Naturally, the best stocks to buy are the ones that will produce the highest combined return.

So which semiconductor stocks will earn investors the best returns today? Obviously, no one can say with total certainty. You should always take future estimates with a grain of salt, particularly when analyst forecasts are involved. In fact, studies show that analysts’ long-term earnings-per-share estimates tend to be off by some 40%, so I’ve reduced their estimates accordingly.

But by running the numbers, we can compile a list of which stocks are the implied best buys today. Here are our assumptions:


Dividend Yield (current)

5-Year Growth Rate (reduced by 40%)

Implied Price-to-Earnings Ratio (in 2016)

Yingli Green Energy (NYSE: YGE) 0% 9% 18
NXP Semiconductors (Nasdaq: NXPI) 0% 20% 29
Alpha & Omega Semiconductor (Nasdaq: AOSL) 0% 12% 21
Entropic (Nasdaq: ENTR) 0% 10% 19
Atmel (Nasdaq: ATML) 0% 12% 21
MKS Instruments (Nasdaq: MKSI) 2.7% 12% 21
Veeco Instruments (Nasdaq: VECO) 0% 9% 18
Nanometrics (Nasdaq: NANO) 0% 9% 18
Canadian Solar (Nasdaq: CSIQ) 0% 6% 15
Micrel (Nasdaq: MCRL) 1.6% 15% 24

Data from Capital IQ, a division of Standard & Poor’s. Includes stocks on major U.S. exchanges capitalized over $200 million, with positive earnings and at least one analyst issuing long-term earnings estimates.

And here are their implied five-year annualized returns for shareholders. I’ve ordered the three return components by their reliability -- first dividends, then earnings growth, then valuation.


Dividend Return*

Earnings Growth Return

Valuation Return

Implied Cumulative Annual Return

Yingli Green Energy 0% 9% 39% 48%
NXP Semiconductors 0% 20% 28% 48%
Alpha & Omega Semiconductor 0% 12% 32% 44%
Entropic 0% 10% 33% 44%
Atmel 0% 12% 25% 37%
MKS Instruments 3% 12% 22% 37%
Veeco Instruments 0% 9% 26% 35%
Nanometrics 0% 9% 25% 34%
Canadian Solar 0% 6% 27% 33%
Micrel 2% 15% 13% 30%

Source: Author’s calculations. *Assumes dividend growth at rate of earnings growth.

The raw numbers tell us that these are the 10 most promising names in semiconductors. Of course, analysts' growth assumptions for any individual company could prove overly optimistic or pessimistic, as could their future valuations, so the implied cumulative returns are hypothetical. Based on the miniscule P/Es of the industry today -- which range from 3.4 to 12.7 -- investors are extremely skeptical that these earnings growth estimates will come true. That said, the high potential returns on fairly low growth estimates indicate that there is a decent margin of safety attached to these stocks should the companies perform, making this list an excellent starting point for further research if you’re interested in the industry.

So don’t stop here. If any of these stocks interests you, add it to your personalized stock Watchlist. If you haven’t started one yet, click here to begin.