SunTrust Stays Very Cautious on Semiconductors: Just 5 to Buy Now

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All great cycles come to an end, or at the minimum, slow down to more normal growth, and in the case of the semiconductors, it has been the kind of run that few tech sectors have seen in years. While the future remains bright, it may not be the white-hot bright of the past five years that produced outsized gains for investors.

In a new SunTrust Robinson Humphrey research report, William Stein and the outstanding semiconductor team stay the course they have maintained for some time: The sector is slowing as it approaches late cycle, and investors need to be extremely selective.

The report said this when highlighting potential hurdles:

Monday Sanmina delivered the first big supply chain read of the quarter reflecting strong demand and tight supply. While revenue beat consensus by ~2% in the quarter and guide, management noted critical component shortages and what looks like an above seasonal inventory build. We believe this, combined with ongoing investor concerns around handset & crypto demand, could throttle semiconductor growth in 2018.

The analysts prefer five stocks they style as “structural growers” and “Merger/Cost reducers.” They are rated Buy at SunTrust.

Analog Devices

This stock could very well benefit from an increase in information technology (IT) spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits (ICs) for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

Last year the company introduced a highly integrated polyphase analog front end with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

The analysts believe that the Linear Technology acquisition, which closed earlier this year, is a huge positive. In addition, many on Wall Street expect that corporate management ultimately will exceed its $150 million of targeted synergies.

The analysts noted this in the report when discussing the acquisition:

We believe the company will see upside to estimates and the multiple owing to (1) Linear Technology related cost savings, (2) de-levering, and (3) realistic revenue synergies as Analog Devices applies its superior commercial practices onto the Linear Technology business.

Analog Devices investors are paid a solid 2.19% dividend. The SunTrust price target for the stock is $86, but the Wall Street consensus target is higher at $103.14. The stock closed above the SunTrust target on Tuesday at $87.65.