At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Who's hot, who's not -- in semiconductor stocks
Wading into the semiconductor sector Wednesday, Topeka Capital announced a series of five new stock initiations -- three buys, and a pair o' holds. Let's take them one at a time.
RF Micro Devices (UNKNOWN:RFMD.DL)Topeka's comments regarding RF Micro start off positive, praising the company's moves to diversify its customer base and add new products, such as switching and antenna control products, to boost growth. The problem with RF Micro, though -- and the reason Topeka can't recommend it -- is that these improvements in the company's business are already "fully reflected" in the company's stock price, which has gained 33% since the lows set back in October.
Unprofitable today, and selling for more than 15 times the earnings RF Micro will (hopefully) earn in 2013, the stock already costs more than its 12% long-term growth estimates warrant. It's a hold -- at best.
TriQuint Semiconductor (UNKNOWN:TQNT.DL)One thing I'll say for RF Micro: At least it's not TriQuint Semiconductor. TriQuint is the second mobile semiconducting stock that Topeka initiated yesterday, and its second hold recommendation. While the analyst likes TriQuint's bulk acoustic wave, or BAW, filter technology in particular, it sees no "significant catalysts to drive revenue and margins."
This is particularly worrisome given that right now, TriQuint's profits margins are negative and its projected growth rate, while respectable at 12.5%, lags the industry average of 15.5%. While cash-rich and free cash flow-positive, the company's simply not generating enough profit to justify a buy rating.
Now for the good news: In addition to these two stocks that Topeka's not particularly hot on, there are three other mobile chip makers that it does like. For instance...
Avago Technologies (NASDAQ:AVGO)
If Topeka likes TriQuint's BAW filters, it's positively in love with Avago, which the analyst calls the "leader" in the BAW filter market and a prime beneficiary of "band proliferation in smartphones driven by LTE." Topeka sees this market as a major growth driver at Avago, and predicts the company's analog business will stabilize as well.
At 14.6 times earnings, the stock's not particularly expensive. Honestly, I'd prefer to see a stronger growth rate than the 11.6% pace that's the consensus on Wall Street currently. But at least the company looks cheaper than the alternatives discussed so far. Add in a modest 2.1% dividend yield, and Avago looks like a decent investment.
Skyworks Solutions (NASDAQ:SWKS)
I laid out my thoughts on Skyworks in a column last month. Suffice it to say my opinion of the stock has not changed since: It's a good company, at a good price, but not good enough to win my investing dollars. (In fact, Skyworks today actually costs a bit more than it did when I expressed reservations over the price in December).
Nonetheless, Topeka comes out in support of Skyworks this week, calling the stock "a compelling buy" and predicting it will "continue to expand its content in smartphones beyond power amplifiers." Topeka also sees "solid revenue growth" and margin expansion in Skyworks' future. If it's right about that, earnings might even increase fast enough to justify buying the stock... without its shares falling in price first. Fingers crossed.
Last but not least, we come to Topeka's fifth and final pick, and the perpetual favorite of mobile communications chip investors: Qualcomm. Predicting " QCOM's current momentum will continue in the near-to-mid-term as the Company gains share in wireless chipsets and at the same time, benefits from robust growth in the smartphone and tablet markets," Topeka initiated the stock at a buy rating and a $75 price target yesterday -- and it may be right to do so.
At 18.5 times earnings, Qualcomm currently looks cheaper than Skyworks. It's got more cash in the bank than any company named so far (more than $12.3 billion, net of debt). On the other hand, its P/E is higher than Avago's, and trailing free cash flow looks a weak.
Result: Topeka thinks that other analysts are selling Qualcomm short (figuratively speaking), and the company will earn more than "consensus estimates" currently count on it earning. It had better. Because right now, even this most famous, and popular, of the mobile semiconducting plays looks only fairly valued at best.
When you get right down to it, I have no strong feelings on any of the five stock ideas that Topeka offered up to investors this week. If pressed, I'd probably say to sell the two stocks it says to hold -- RF Micro and TriQuint -- and hold the three stocks it says to buy -- Avago, Skyworks, and Qualcomm. But honestly, none of these stocks really screams: "You must rush right out and buy this today."