In less than a decade, nearly every man, woman, and child on the planet will own at least a dozen smart devices…

A smart device is an electronic gadget that can connect to other electronic devices or networks wirelessly. These devices can also interact with one another and their users.

You probably have a smart device within five feet of you right now. In fact, some of you are reading this email on your smartphone.

But smartphones aren’t the only smart devices out there.

There are smart thermostats for your AC unit… Smart refrigerators for your kitchen… Even smart coffeemakers to make your cup of joe.

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There are even smart devices for your newborn.

A company called Nanit makes cameras that monitor your baby while he or she sleeps. You can livestream the images to your mobile device… and watch your baby from anywhere in the world.

That’s not all this device does.

It can learn your baby’s sleeping patterns… and analyze them for you. I’ve even heard rumors that the device plays lullabies if your baby awakens at night—singing them back to sleep.

The smart-device trend is going to be huge.

According to forecasts by market research firm IHS Markit, there will be over 75 billion smart devices by 2025. (That’s up from just 8.4 billion connected devices used this year.)

That averages out to more than 12 devices per man, woman, and child across the globe.

And there’s one thing all these devices have in common: they all use microchips. These tiny chips serve as the “brains” of smart devices.

But the companies that make these chips are flying under the radars of most investors.

Over the past week, we’ve been searching for value in the market. Last week, I showed you that the retail sector was a bargain.

And in yesterday’s Daily, I told you why the sell-off in theater stocks made them a good deal.

Today, I’m going to show you why chipmakers are also a good buy.

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Chipmakers Are Growing

As I said above, there will be 75 billion smart devices online by 2025. Each one of them will need microchips.

Let me put that in perspective…

According to some estimates, the total number of computers ever made stands at around 4.6 billion. Smartphone shipments are expected to be 1.9 billion by 2018.

As you can probably tell, this is good news for semiconductor companies. They make the microchips that go into those 6.5 billion computers and smartphones.

In the next decade, they’ll need to crank out more than six times as many chips than they’ve ever produced.

These companies are growing quickly to meet the new demand.

And they’re just not growing… They’re cheaper than the overall market, too.

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And They’re Cheap, Too

To look for cheapness, I like to check out a company’s forward price-to-earnings (P/E) ratio. (The P/E ratio measures how much you’re paying for each dollar of next year’s profits.)

The table below displays the growth rates and P/E ratios of several chipmakers.

Company

 Ticker 

Forward P/E Ratio

Growth Rate

Lam Research

LRCX

16.6

25%

Micron

MU

7.4

10%

Applied Materials

AMAT

14.4

16%

MACOM Technology Solutions

MTSI

17.9

20%

Broadcom

AVGO

14.9

15%

Cypress Semiconductor

CY

17.5

22%

ON Semiconductors

ON

12.8

25%

Microsemi Corp

MSCC

13.1

13%

S&P 500 Index

 

19.4

2%

As you can see, the growth rate is higher than the P/E ratio for nearly all these companies.

In the words of famed investor Peter Lynch: “If the P/E ratio is less than the growth rate, you may have found yourself a bargain.”

Chipmakers are giving us plenty of bargains right now.

Remember, this list is just a starting point for finding good chipmakers. As always, do your own research before making any investments.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

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