Hope everyone had a terrific Labor Day Weekend and is ready to get back to business. Most investors are returning to the market after the summer break, and we should see a nice rise in volumes. We still have one position open in KB Homes (KBH). I left the position open on Thursday for a Short Sale with an average entry of 11.62. The market has brought this position back into neutral ground today, and I am hoping to exit this position for a small gain finally.
We are going to start off the week with a Play of the Week. Here it is…
Play of the Week: National Semiconductor Corp.
Analysis: Its a slow week on the earnings front. The big names are Shanda Games (GAME), Lulumon Athletic (LULU), and National Semiconducor (NSM). The one that stands out to me is that last name…especially the semiconductor part. Say what you want about overusing something, but I have had consistent success with these plays. NSM is in the broad line semiconductor industry, and it is projected to report an EPS of 0.35 vs. 0.13 one year ago. With the market making a pullback today, it has created a buying opportunity for NSM. National Semi works closely in the analog sector with mobile companies, automotive companies, PV makers, industrial equipment, and more.
Since the beginning of July, 16/20 of reporting companies have reported positive surprise earnings. NSM’s most consistent competitors and similar companies include Analog Devices Inc. (ADI), Maxim Integrated (MXIM), and Texas Instruments (TXN). These companies reported surprise earnings of 9%, 7%, and even, respectively. In the three day movement into earnings, ADI jumped over 7%. MXIM jumped 2%, and TXN moved down into earnings but moved over 5% in the three days.png)
after reporting earnings. NSM is in an industry that for the most part moved into or out of earnings, and NSM is currently three days before the earnings report is looking like it is ready to move up into earnings with its current undervaluation.
In the past three months, the company has been continuing to become a major player in analog devices. The company boosted its dividend, acquired a new company, got a great upgrade, and introduced a new industry device that could pave a great wave of future customers. In July, the company raised its dividend by 25%. Any rise in a dividend is a great sign of a healthy company for me. The company is noticing it has significant cash on hand, which is a great sign of business. The company, additionally, acquired GTronix, which is a analog device company that produces a product that helps with noise cancellation in mobile phones and audio interface. The acquisition allows NSM to build on its mobile device offerings.
In June, the company got a significant upgrade from S&P that will allow it to borrow at lower interest rates. The company moved to a BB+ rating.
"The rating reflects the company’s strong position in high-performance analog semiconductors, improving leverage trends, and good profitability," said Standard & Poor’s credit analyst Lucy Patricola.
The company has had outstanding earnings over the past year with strong guidance moving forward. That is why this company makes such a great Play of the Week rather than Overnight. The company has beat earnings consistently over the past four quarters and continues to outperform and guide higher. The company should be getting a lot of interest after a dip today and into the rest of the week.
One final bit of information that is exciting is that the company launched new analog device tools in Japanese and Chinese this past quarter, which shows a strong movement into Asia. Additionally, chip sales rose in June 0.5% over May. July were up 1.2% from June, and August is still unannounced. Chip sales are up 50-60% from one year ago. The company’s expected revenue is $414 million vs. $314 million one year ago. This shows only a 30% improvement, which makes me look at the estimates as being undervalued as well.
Get in while you can!
Entry: We are looking to enter NSM at 13.00 – 13.10.
Exit: We are looking to exit for a 3-5% gain or sell on Friday morning after earnings.
Stop Loss: 4% on bottom.
Good Investing,
David Ristau
