Zacks Industry Rank Analysis Highlights: Altera, Tower, Freescale and Intel

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Nov 10, 2011, 09:30 ET

CHICAGO, Nov. 10, 2011 /PRNewswire/ -- Stocks featured in this week's Zacks Industry Rank analysis include Altera (Nasdaq: ALTR), Tower (Nasdaq: TSEM), Freescale (NYSE: FSL) and Intel (Nasdaq: INTC).

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Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.

Suffering Semiconductors

There are a total of 123 firms in these eleven industries combined. Of those, 24 (19.5%) of them hold the dreaded Zacks #5 Rank, and an additional 35 (28.5%) have Zacks #4 Ranks. If the Zacks ranks were random, then one would expect that 5% of the names in an industry would be #5's and 15% would be #4's.

Most of the firms are either small (below $1 billion) or mid-cap firms (between $1 billion and $5 billion). Only one, Altera (Nasdaq: ALTR) is a bona fide large cap with a market cap of over $10 billion. It and the mid-caps most likely have options that could be used to bet against the firms, and they probably have enough liquidity that you could, if so inclined, short them. As for the small caps, sell them if they happen to be in your portfolio, but if not, it is probably best to just ignore them altogether.

Vast Array of Valuations

The valuations on these firms are all over the lot, ranging from seemingly super-cheap low-single-digit levels based on 2012 earnings, to those where the P/E cannot be calculated because the firms are expected to lose money. If you have a strong stomach and a long-term investment horizon, it might be worth taking a flyer on the super-cheap ones such as Tower (Nasdaq: TSEM) or Freescale (NYSE: FSL), but even so you would probably be better off waiting a few weeks to do so. The expectations are dropping like a rock, and an estimate in motion tends to stay in motion.

Thus it is very likely that the estimates will continue to fall, and that the true earnings will turn out to be much lower than the current estimates anticipate. Therefore, the "true" P/E based on both 2011 and 2012 earnings will be much higher than shown here. Very few of the companies pay a dividend, so there is no yield support for them.

If you do feel the need to have a chip stock in your portfolio, stick to the larger cap firms that offer solid balance sheets and good yield support that still have Zacks Ranks of at least #3. The 800 lb gorilla of the industry, Intel (Nasdaq: INTC) fits that description nicely. It has a Zacks #2 Rank, and offers a very nice dividend that the firm has consistently been increasing in recent years.

This is no time to be a hero buying beaten down small caps with deteriorating earnings prospects. Low P/E's based on earnings that are falling apart are the thing that value traps are made of. In any case, the market capitalization of INTC is substantially bigger than all 59 firms on both lists below. At current prices, INTC could buy the 30 smallest of them with the cash on its balance sheet alone.

Given that the chips are at the base of the tech food chain, it would also make sense to be cautious on other tech firms, particularly on the hardware side. I would note that several other industries that provide components (i.e. miscellaneous components, connectors, fiber optics and solar, which shares lots of technology with chips) to the tech sector are also showing weakness on the Zacks Rank as well.

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Contact: Dirk Van Dijk, CFA
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