Apple’s BFF: Silicon Laboratories

The semiconductor business has turned bullish all of a sudden, as the sector’s customers race to rebuild their inventories. Now companies that were once on the decline are upping guidance and reporting better-than-expected quarters. The trend makes a strong fundamental case for these stocks, but Cramer on Friday was thinking more about speculation.

Consumer demand seemed to rebound out of nowhere. That sent product makers such as Apple , Nokia , Motorola and Cisco Systems scrambling to catch up. The common thread among all these firms, of course, are the chips that power their cell phones, MP3 players and networking equipment. Nothing gets to market without the help of the semiconductor companies, in this case Silicon Laboratories . That’s why Cramer thinks the company might be the best way to play what should be an extended tech rally.

SLAB makes chips for everything from global positioning systems to high-definition televisions to the aforementioned phones and voice-over-Internet devices. But these aren’t commoditized chips. SLAB focuses on shrinking a company’s many moving parts down to one semiconductor. The result? Smaller, cheaper products that burn less energy. Silicon Labs’ customers are hooked – literally. These chips are so integral to the products Apple and others make that the cost of changing would be prohibitive.

Beyond the winning business model, SLAB runs a tight ship, too. Even during the downturn, gross margins clocked in north of 61% for the fourth quarter. And that’s with revenues declining 12.5%. At the same time, the company closed down a design center, cut back on contract employees and eliminated executive raises for 2009. Now a stronger Silicon Labs is emerging as the market turns up.

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Here’s how you play it: SLAB is up after a run, so wait for this $27 name to pull back to $25. Analysts have cut 2009 earnings estimates 40% over the past 90 days on the assumption the company’s stellar margins will contract. But given the cost controls and burgeoning semiconductor market, Cramer doubts that will happen. The stock trades at 21 times earnings, the low end of its historical range of 20 to 30, and there’s a good chance the increased business will push that multiple – and the share price – higher.

Keep in mind, though, that this is a speculation trade, not an investment. SLAB works as a play on this next quarter being bullish for tech. So hold onto the stock until the company reports earnings, Cramer said, and then take profits.

Cramer's charitable trust owns Cisco Systems.

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