'ChangeWave' sees upcycle for semis

"The momentum in the semiconductor industry appears to be in the earliest stages of an emerging up-cycle that should last into 2009," says growth stock expert Toby Smith.

In his ChangeWave Investing, he looks at two lesser-known plays -- Monolithic Power Systems (NASDAQ: MPWR) and ON Semiconductor Corp. (NASDAQ: ONNN) -- saying, "Both are fundamentally solid with significant room to grow in the coming two-to-four quarters."

"The chip business is a reliable forward indicator for economic strength. Rising orders for these tiny, essential components signal that demand for everything from smartphones to DVD players to automobiles is building.

"The chip companies we're recommending are well-positioned in the analog sub-segment, with a majority of their business devoted to power management applications. You may not have heard of these companies because they're not household names. But their chips are found in products we use every day.

"Monolithic Power Systems, which is a relatively small player and is winning lots of business in a wide range of end markets.

"Its Direct Current (DC) to DC Converters are used to convert and control voltages within numerous products, including portable electronic devices, wireless LAN access points, computers, automobiles and medical equipment.

"Its Light Emitting Diode (LED) Driver ICs are used in lighting displays in small, portable devices, such as color cellular handsets, personal digital assistants, GPS and electronic gaming systems, and in applications like traffic lights and automobile signal lights.

"And its Liquid Crystal Display (LCD) Backlight Inverters are used in systems that provide the light source for LCD panels typically found in notebook computers, LCD monitors, car navigation systems and LCD televisions.

"As you can see, MPWR serves a host of fast-growing businesses, and this is reflected in its recent financial performance. First-quarter revenue jumped 45% from a year ago to $35.4 million, while EPS was 18 cents versus a 1-cent loss a year earlier.

"The company's edge stems from its ability to design superior, highly integrated chips at very competitive prices, since they are made at low-cost plants in China. Monolithic is also expanding its reach from its core customer base in China and Taiwan, and gaining additional new customers in the United States and Japan.

"Like MPWR, ON Semiconductor also supplies an extensive portfolio of chips for many electronic devices. The end-user markets served include consumer electronics, computing, wireless communications, automotive electronics, industrial electronics and networking.

"Applications for ON's products include portable electronics, computers, game stations, servers, automotive and industrial automation control systems, routers, switches, storage-area networks and automated test equipment.

"To get a real idea of the range of applications, ON's product portfolio contains nearly 30,000 items, and the company shipped 32 billion units in 2007.

"ONNN recently reaffirmed its Q2 revenue guidance of $552.5 million (in-line with analysts' consensus estimates) and said it's comfortable operating in the 40%-50% range for gross margins. Importantly, the company has identified $100 million to $130 million of total annualized savings.

"Management pointed out that stronger trends from the end of Q1 have continued into Q2, as business in China picked up after their new year, and also thanks to fewer headwinds during Q2 compared to last year. Pricing power is looking better, too.

"According to our Alliance research, while most of the industry's sub-segments are still in negative territory, analog and power management are the places to be."