When one of the biggest names in investment banking endorses one of the biggest names in semiconducting, investors are bound to take notice. That's why today, we're going to take a close look at some very big news coming out of Wall Street:
Bank of America Merrill Lynch just added Qualcomm (QCOM +1.23%) to its "US1" list.
Who did what to what?
Why is this important? Merrill Lynch is one of the top-rated investment bankers in the world. In fact, according to our data at Motley Fool CAPS, where we've been tracking its performance since as far back as 2006, Merrill Lynch is ranked in the top 5% of investors.
Now, this top-ranked banker is saying that Qualcomm is such a good investment that it deserves a slot on the US1 list, a curated collection of Merrill's very best investment ideas drawn from the banker's list of already-buy-rated stocks. But why?
Merrill Lynch's logic
Explaining its move, Merrill Lynch argued that "Qualcomm is a long term beneficiary of growing 3G/4G smartphone, tablet and cellular enabled machine to machine adoption worldwide." Although the stock has hit some tough times, and is down 32% over the past year, Merrill expects this trend to reverse: "While QTL licensing revenues are decelerating, we expect the mix shift toward emerging markets to stabilize and the royalty rate to be supported for the foreseeable future..."
At the same time, the fact that Qualcomm shares are down so much, says Merrill, gives investors today an "attractive entry point" to buy the stock before that stabilization becomes apparent. In short, for buy-and-hold investors, Qualcomm's low share price is a plus, not a minus. But is Merrill Lynch right about that?
Let's go to the tape
Early indications look good. According to our data from Motley Fool CAPS, Merrill Lynch gets the majority of its stock picks right -- and on average, its stock recommendations tend to outperform the S&P 500 by about 20 percentage points per pick (over time). Merrill's also particularly good in the semiconducting industry -- currently the third-largest area that the banker covers.
A few of its more successful active recommendations today include:
|
Company |
Merrill Lynch Says: |
CAPS Says: |
Merrill Lynch's Picks Beating S&P By: |
|---|---|---|---|
|
NVIDIA |
Outperform |
***** |
98 points |
|
Analog Devices |
Outperform |
**** |
81 points |
|
Intel |
Outperform |
**** |
47 points |
And as you can see from the four- and five-star ratings that our own CAPS members have been assigning these stocks -- these recommendations are largely endorsed by individual investors as well as by Merrill Lynch.
Valuing Qualcomm
And not without reason. With Qualcomm stock selling for just 15.4 times earnings today, the stock trades at about a 30% discount to the average valuation of the communication equipment industry, according to Yahoo! Finance data. Between the stock's 11.5% projected long-term growth rate, and its generous 3.9% dividend yield, Qualcomm shares are being valued at a total return ratio of precisely 1.0.
Famed value investor John Neff would tell you that that's the very definition of a "fair price" to pay for Qualcomm stock. Granted, that may not be the same thing as Qualcomm stock selling for a discount. But as even more famous value investor Warren Buffett would tell you, some of his own best investments came from buying great companies at merely good prices.
The upshot for investors
And Qualcomm surely is one of the "great" semiconductor stocks out there. Rated four-stars on CAPS, and valued at $74.2 billion in market cap, Qualcomm is second only to Intel in size among semiconducting large-caps. And yet, relative to Intel, Qualcomm is growing faster, pays a bigger dividend -- yet carries a P/E only a fraction of a point more expensive than does Intel.
Add all of that up, and marry it to Merrill Lynch's strong record of picking winners in the chips industry -- and I think the chances are very good for this stock to outperform the market.
