Contrary look at semis and renewable energy

by Jim Oberweis, Jr., editor The Oberweis Report

Paranoia is indeed pervasive in the marketplace today. Even our ever-optimistic team has been waking up in the middle of the night.

And there’s no place where that paranoia runs deeper right now than in semiconductor and renewable energy stocks. Even though these two industries are among the few that have realized significant growth, nobody cares.

Company after company has beaten analysts’ earnings estimates this quarter, only to be greeted in the stock market with a big fat yawn.They are cyclical businesses, the analysts’ shtick goes, and tomorrow will surely be worse than today.

Good news, the tortured prisoner of the market professes, can’t possibly last. So it is only with embarrassed consternation that we tell you that we have been wondering, as dangerous as that might seem, if maybe – just maybe – the pessimism might prove overdone.  

Admittedly, we remember the unpleasant headache left by the 2008 hangover. We remember the dearth in semiconductor capital equipment spending and the road kill left in its tracks.  

We remember the pounding solar stocks took when subsidies were cut, oil dropped, and energy demands fell with the tough economy. We have no desire to live through it all again. All that said, in contrast to last time, lots of folks are expecting the cloudy days.

Very low stock valuations reflect much of the risk already.  We are hearing continued confidence for growth in the near term from CEOs out in the field within the semiconductor and renewable energy industries.  

We also believe that analysts are unlikely to know better than industry CEOs themselves about when the cycle may turn, and we are not finding evidence of slowing yet.

With stocks of many small and mid-size capital equipment makers substantially off their highs, I trekked out to San Francisco looking for bargains.  

Within semiconductor capital equipment, Nanometrics (NANO), Ultra Clean Holdings (UCTT), Kulicke and Soffa (KLIC) and Brooks Automation (BRKS) are our favorites.  

Many small-cap names in the group will experience growth of 50-75% this year and carry valuations of only 10x forward earnings. We expect growth will continue – albeit at a slower rate – in 2011.

Sure, growth won’t always be as strong as it is today, but valuations won’t always be this cheap either. Among integrated circuit developers, we like Monolithic Power Systems (MPWR), which develops analog and mixed signal chips for lighting displays.

Both Ultraclean and Monolithic Power have already reported very strong results for the second quarter, while the others should be reporting shortly.

In renewable energy, we suggest American Superconductor (AMSC), which designs wind turbines and their associated electrical control systems, and Power-One (PWER). Power-One produces inverters to facilitate harvesting clean power from wind and solar energy.   

Both reported very favorable results for the second quarter. Indeed, Power-One’s results were absurdly good, and the company reported an extremely favorable book-to-bill ratio of 3.5. Even though the stock jumped 25% on the 7/30 earnings report, it still remains undervalued.

Perhaps high paranoia is usually a good sign for growth stock investors. It means that expectations are not inflated. It’s no sure thing that renewable energy and semiconductors will extend their cyclical growth trend.  

But neither is it a given that they won’t, at least for longer than folks expect. With the market pricing stocks as if a slowdown is a sure thing, semiconductor and renewable energy stocks are worth a contrarian look.

Learn more about this financial newsletter at Jim Oberweis, Jr.'s The Oberweis Report.