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Insiders See Gains Ahead at Three Micro Cap Chip Plays
By Michael Brush
Exclusively for InvestorIdeas.com
May 8, 2008
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One of my favorite newsletter writers, George Putnam who pens the Turnaround Letter, recently told his readers to get exposure to the beaten-down chip sector through the iShares S&P GTSI Semiconductor (IGW) exchange traded fund (ETF) -- for solid diversification.
Putnam thinks the chip sector could be “nearing the bottom of a major trough, as technology spending is likely to increase in the coming years.” He’s worth listening to. Putnam, a contrarian, is consistently one of the top-performing newsletter writers over the long term, according to Hulbert Financial Digest.
While an ETF can provide greater diversification, a mini-wave of insider buying last week in the chip sector also points the way to several company-specific plays investors can use to get exposure to the sector, as well.
MoSys (MOSY)
The most compelling signal came at MoSys (MOSY), where director Carl Berg just bought $1.1 million worth of stock at around $5.20 on strength in the shares – following a long period of weakness.
Berg is an insider well worth following – even if it may require lots of patience to hit the jackpot. For example, Berg has been steadily and patiently accumulating the shares of battery technology company Valence Technology (VLNC) under $2 a share since July 2006. Waiting to be rewarded on that one was like watching paint dry. But the stock finally caught fire and traded north of $4 in March.
Now, Berg is betting on chip technology from MoSys that may make big inroads into high definition DVD players and set-top boxes, fast networks, and cell phone displays. MoSys traded as high as $10 a share in 2006 but took a bad tumble in 2007. The chart suggests it has bottomed and is rebounding, and Berg’s mega-purchase certainly confirms this.
MoSys develops and licenses a chip technology called 1T-SRAM. The company says it offers three advantages. The technology provides high speed processing that doesn’t consume too much power – and it’s not too expensive. MoSys technology is used in some high resolution mobile handset displays and the Wii game console from Nintendo.
Last summer, MoSys picked up technology from Atmel (ATML) and a private chip company called LSI Design and Integration, along with and some of their subsidiaries in Romania and China. Drawing on these assets, MoSys thinks it can license technology that will be used in:
* processors that help personal computers, DVD players and set top boxes support high-definition resolution;
* gigabit Ethernet networking applications including wireless networks and voice-over-Internet protocol;
* network switches that enable high-speed connections and data transfer among computers and storage devices.
The company is also developing several other memory technologies including one about to go to market called 1T-FLASH.
One great thing about MoSys is that it has plenty of breathing room to develop new chip technologies. The company has a solid margin of safety with about $77 million in cash or over $2 a share, and no debt.
Cirrus Logic (CRUS)
Cirrus Logic (CRUS) shares fell to $5.75 this month from above $7.50 in late April on news that the company had swung to a loss in the fourth quarter and was guiding down on first-quarter sales estimates.
But at least one insider thinks the pullback is overdone. The head of industrial production just bought $227,500 worth of stock. The same insider and a few others purchased $829,000 worth of stock in the $5 range in the past several months.
Cirrus Logic develops chips used in audio, industrial and aerospace apps. The big hope for the company is that its technology is designed into new iPod portable media players expected to be released by Apple (AAPL) this fall.
If not, the company has the financial strength to wait it out until it finds other markets. It has about $181 million in cash, or about $2.10 per share.
Microtune (TUNE)
Shares of the chip maker Microtune (TUNE) dropped sharply in late March to $3.50 from $5, on disappointing earnings news. The stock has bounced around between $3.50 and $4 since. Earlier this month, a director picked up $191,000 worth of stock for about $3.80 a share.
Microtune shares got hammered in part because its chips failed to make enough headway into the converter boxes that old-school TV fans will use to watch digital signals on their old analog TV sets. The broadcast TV system in the U.S. switches over in February 2009.
But the company’s chips are also widely used in cable set-top boxes, cable modems and car radios. The insider buying suggests enough strength in these segments lies ahead, or that it will make better progress with the converters.
The company also just announced a share repurchase plan that could sop up $10 million worth of stock by the end of this year. Microtune has about $84.5 million in cash, or around $1.50 a share, and no debt.
The bottom line: Chip makers are notoriously volatile, and the time to buy them is when they are down. If you need some hand holding, follow these insiders.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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