Are you looking for a tip on the next hot investment? Goldman Sachs has an interesting idea… Move toward US companies with high exposure to international sales. Goldman points out that such companies are on an upswing in 2H19, and that a basket of such stocks has been outperforming both the firm’s other portfolios and the broader S&P 500. For comparison, the firm notes that its ‘international sales exposure’ basket is up 29% this year, compared to the S&P gain of 23%.
Stephanie Cohen, Goldman Sachs’ chief strategy officer, in an interview last week talked down fears that the US-China trade tensions are unwinding long-established economic cooperation between the two countries. She said, after a visit to Chinese tech companies in Shenzen, “It’s not that we’re decoupling. If you sit on the ground and you’re talking to companies, people are continuing to talk about ways that they can do business together.”
Goldman Sachs has a decades-long record pursuing investment and business openings in China. The firm has partnerships with Chinese banks, and has taken the time to learn the facts on the ground. And now they see opportunity in the US companies that are most exposed to the international scene, where China is working hard to throw its weight around.
Looking into Goldman’s basket of stocks with international exposure, we’ve chosen three that TipRanks’ database reveals have shown recent strong gains, a healthy upside potential, and recent Buy ratings from 5-star analysts.
KLA Corporation (KLAC)
This company services the semiconductor chip industry, providing essential process control and management systems for manufacturers of silicon wafers and integrated circuits, along with quality control and precision metrology. As the industry shifts to new, higher performance chips, and to 5G networks, the need to maintain quality tolerances becomes more important, and KLA, with operations across the US, Europe, and the Asia/Pacific regions is well-positioned to benefit. KLA shares have brought in a disproportionate 97% year-to-date return to the Goldman’s international exposure basket.
Looking at the numbers, KLA’s revenue growth over the last few years confirms the company’s importance to the industry. It brought in $2.98 billion in 2016, and has seen that number grow to $4.6 billion in fiscal 2019. In its fiscal Q1 2020 report, the company showed that revenue is still growing, with quarterly sales gaining 12% year-over-year to $1.41 billion.
KLA has been active in the past several years making relevant acquisitions. The most recent, metrology tool-maker Capres A/S, was purchased in March of this year for an undisclosed amount. Last year, in a deal worth $3.4 billion, KLA acquired Orbotech, a major producer of circuit boards and flat-panel displays. The deal was completed in February of this year, after clearing regulatory hurdles in China.
Writing from JPMorgan, top analyst Harlan Sur sees KLAC shares in a boom period. He writes, “We believe semiconductor capital spending is in the midst of a technology-driven cycle for 7nm/5nm Foundry/Logic, sub-20nm DRAM, and high layer count 3D NAND. As device manufacturing complexities increase, the need to analyze defects and metrology issues at critical points in the IC manufacturing processes increases significantly… [KLA] has diversified end-market exposure through the acquisition of Orbotech." Sur gives KLAC a $200 price target, implying an upside of 13%.
KLA stock has a resounding “yes” on Wall Street. TipRanks analytics show that out of 12 analysts, 10 are bullish, while 2 remain sidelined. The average price target of $191 shows a potential upside of about 8%.
Microchip Technology (MCHP)
With a market cap of $22.3 billion, Microchip is the sixth largest semiconductor manufacturer in the US. The company produces chips for the microcontroller and microprocessor industry, power management applications, memory solutions, and wireless connection devices. In the 2019 fiscal year, ending this past March, Microchip brought in $5.35 billion in total revenues. Last year, the company acquired competitor Microsemi in a deal with $10 billion.
The US-China trade war has hurt Microchip, depressing sales through much of this year. Until this past September, the stock showed high volatility. Even with that, the MCHP is up 30% year-to-date, a solid performance based on the quality and necessity of its products. The company’s first and second quarter fiscal 2020 reports have also helped to allay investor fears. Microchip earnings beat or met expectations in both quarters, while revenues were up year-over-year.
Even with the two good quarters, Microchip’s sales are down year-over-year, and the company has revised its full-year guidance downward. In a way, this may be a case of lowering expectations to set up a positive financial report – BMO's top analyst Ambrish Srivastava points out.
“Unlike the better guidance/commentary we got for December from companies last week, Microchip's guidance is for lower revenues than expectations, and calling for yet another double-digit y-y decline in sales,” Srivastava noted. In his bottom line, however, Srivastava says, “We like Microchip's operating model. We like the valuation, we like the two rounds of estimate cuts we have already seen. We see the company as among the higher rungs of diversified businesses we would like to recommend in our coverage.” His $110 price target implies a 16% upside for the stock.
Hans Mosesmann, 5-star analyst from Rosenblatt Securities, also sees management’s performance as key to MCHP’s share price prospects. He writes, “MCHP's environment remains uncertain, as the trade war and broad-based macroeconomic weakness hinder visibility. Management continues to execute well, however, and has managed the down-cycle with low channel inventory going forward... We continue to believe mid-to-longer term investors will have increasing confidence in management's ability to execute, as the company looks to exit this down-cycle gaining market share in secular MCU/analog markets and increase operating margins.” Mosesmann puts a $115 price target on the stock, for a 22% upside potential.
Wall Street’s analysts are sanguine about this stock’s ability to gain going forward. Microchip’s Strong Buy consensus rating is based on 12 Buys and 2 Holds. It doesn’t hurt that its $109.31 average price target puts the potential twelve-month rise at 16%.
And now we move away from the semiconductor sector and into the internet. We all know Alphabet; the parent company of Google, with a market cap of $893 billion, is the world’s fourth-largest publicly traded company. With over $136 billion in annual revenue, and $30 billion in net income, there is no doubt that Alphabet will hold its position near the top.
GOOGL shares are up 24% year-to-date, just slightly outperforming the S&P 500, after an earnings miss in the Q3 report. While revenues were up, at $40.5 billion, the EPS of $10.12 missed the forecast by 18.5%. The earnings slip came as the company increased capital expenditures from $5.28 billion one year ago to $6.73 billion in the current report. The company is increasing spending on its cloud sales force, and has just made a $2.1 billion offer to acquire smartwatch company Fitbit. The acquisition, if approved, will put Google in a direct position to compete against Apple in the smartwatch and wearable niche.
Fitbit will make an interesting addition to Alphabet’s ‘other revenue’ category, which includes both cloud systems and hardware. This category saw quarterly revenue of $6.43 billion, beating the forecast of $6.32 and coming in 38.5% above the year-ago quarter.
So GOOGL has a firm foundation in its core search engine business, strong ad revenue, and rising revenues in its other endeavors. It’s a solid picture, and explains why the stock makes up 2.26% of Goldman’s ‘international exposure’ basket. Google’s global reach and profitability are undisputed.
5-star JMP analyst Ronald Josey is enthusiastic about the Fitbit acquisition, putting a $1,450 price target on GOOGL and writing, “We believe Fitbit is a natural fit with Google’s current hardware brands that include its Pixel phones, Nest connected home products, and Google home smart speakers under its Made By Google brand, along with its Android OS… we believe Google is investing in developing the hardware and touchpoints that will enable its ambient computing strategy…” Josey’s price target suggests an upside for 12% for GOOGL shares.
5-star analyst Stephen Ju, of Credit Suisse, focused more on Alphabet’s free cash flow position in his comments, saying, “Google in our view is a controlled outcome, with management looking to drive consistent revenue and FCF growth through the amassing and creation of a portfolio of assets even as the law of large numbers begin to result in deceleration for some of the largest businesses… overall revenue growth has once again settled into a managed ~20%+ range… Google has resumed free cash flow growth this year after two years of investments.” Ju puts a $1,700 price target on the stock, showing confidence in a bullish 31% upside.
GOOGL’s Strong Buy consensus rating is based on 25 Buys set in the past three months, against just 4 Holds. Analysts are confident that the company can meet the challenges inherent in the ever-changing digital world. Shares sell for an eye-popping $1,296, but the average price target, $1,455, truly gets into nosebleed territory. The stock has an average upside of 12%.