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Semi Stocks Set to Rally?

The charts seem to point to a coming breakout in the chipmakers, Cramer said Friday, and Microchip Technology might be the best way to play it.

Top-rated technical analyst Helene Meisler has said that the ratio of the Philadelphia Semiconductor Index versus the Nasdaq has dipped to a level from where the SOX has repeatedly snapped back in a rally over the last 18 months. She thinks a similar move is about to happen again.

Why buy Microchip to trade it, though? While the company isn’t best of breed, it is cheap. “And this move should trickle down to the less expensive chip stocks, too,” Cramer said, especially when they have big dividends. Right now MCHP yields a healthy 4.5%.

Microchip Tech is known largely for its microcontollers, which account for 81% of sales. These are tiny computers all on one standalone chip, and they include a processor, memory, input and output that are most often found embedded in other processors. You find them inside PCs, car airbags, TV remote controls, power tools, kids’ toys and any number of medical devices. In essence, they help manufacturers save space.

MCHP controls the less sophisticated 8-bit microcontroller space and is taking share in the higher-performance 16-bit and 32-bit businesses. In fact, the company is among the top 10 players in the 16-bit market and still climbing the ladder. At the same time, Cramer pointed to a key acquisition made back in April, of Silicon Storage Technology, that is expected to add 20 cents a share to Microchip’s earnings in the next fiscal year.

The most recent quarter, reported Aug. 5, beat the Street’s consensus estimates by 4 cents on a 51-cent base. Revenues were up across the board, gross margins reach 64%, and the backlog was strong, with next quarter’s business fully booked. How’s that for earnings visibility? Plus, the company raised guidance for the next two quarters and even threw in a slight dividend boost.

Yet despite all this, still the stock is cheap. MCHP trade at only 12.5 times fiscal 2012 earnings, though that multiple is closer to 10 when you back out the stock’s $6 of cash per share. So don’t let the fact that Microchip is just two points from its 52-week high scare you. This one’s still a buy, as far as Cramer’s concerned, especially with that sizable dividend yield.

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