Is now the time to aggressively buy semi stocks, i.e. is the bottom of the cycle near?

Financial analyst Doug Freedman at American Technology Research says yes.

“Semiconductors and the market have had a nice move in recent weeks, but we think there is another leg higher as we move to be more constructive and vocal in our “Overweight” semiconductor sector call at this time. We believe it is an opportune time to aggressively buy semiconductor stocks in light of recent under-performance of the SOX as we move past seasonally weak demand periods. Several signs exist that the stocks are becoming more attractive to value investors and that we may look past a macro bottom in the next 3 to 6 months, suggesting now is a good entry point,” he said.

Interestingly, and probably some relief to many, Freedman also said that recent activity within the semiconductor universe suggests a bottom is near for the following reasons:

–Forward P/E multiples are coming off a recent trough, while still trading at multiples in the low- to mid-teens;
–In terms of free cash flow, semiconductors appear to be valued like mature cyclicals, with free cash flow yields in the 7% range, implying a rational P/E multiple in the mid-teens. He believes semis should have a small measure of growth premium above the pure cyclicals;
–Merger and activist interest is increasing. As seen by activist interest in Micrel shares, alternative investors are emerging that could put a floor in valuations; this had been a sign he was looking for as private equity has lost some ammunition due to the credit crunch;
–Freedman believes inventory levels throughout the supply chain have been worked down as macro issues have universally and globally changed business practices.

At the same time, he also said he expects some impact from increased transportation and other commodity/natural resource expenses to limit gross margin leverage.

Still, at this point, AmTech is more constructive and vocal in its overweight recommendation of the semiconductor group due to several classic indicators that the group could emerge from a bottom in the near-term, but remains neutral on the capital equipment sector as its bottom will be driven by memory capex.

“We have been holding off on recommending an aggressive long position in this group until now as we are strongly encouraged that several separate indicators may signal the end of earnings declines and multiple compression,” he added.

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–Ann Steffora Mutschler, Senior Editor