Bet on a Bounce in the ‘Internet of Everything’

Despite only four days of trading it was the strongest week in recent memory, with the Dow Jones up 2.62%, the S&P 500 jumping 2.84% and the NASDAQ soaring 3.85%. The MCSI Emerging Markets Index also ended the week 3.14% higher.

Big gainers in your Bull Market Alert portfolio included Phillips 66 (PSX), which added 6.50%, and Kinder Morgan (KMI), which gained 11.78%.

With markets rallying, your position in the Direxion Daily CSI 300 China A Share Bear ETF (CHAD) now has slipped into the red. Nevertheless, I am recommending that you hold onto this position for now. China’s stock market and economy remain weak, and this remains a good hedge on your other portfolio positions.

This week’s Bull Market Alert recommendation takes us back to a previous big winner, Skyworks Solutions (SWKS).

Skyworks is engaged in the design, production and marketing of high-performance mixed signal and analog microchips. Skyworks’ products are used in automotive, global positioning system (GPS), industrial, medical, wireless networking, smartphone and tablet applications. Skyworks also makes the radio frequency (RF) chips in Apple’s smartphones, earning nearly 35% to 40% of its revenue from the computer giant.

Here’s why I think Skyworks will recover strongly in the weeks ahead.

First, Skyworks is riding the big megatrend of the “Internet of Everything.” It is taking everything it has learned about communicating with smart phones and tablets and applying that technology to cars, entertainment boxes and a host of other smart appliances from smoke detectors to light bulbs.

Second, the company is also diversifying its revenue base. On the one hand, Skyworks is an indirect and leveraged play on Apple, and will likely benefit tremendously from Apple’s upcoming iPhone 7. On the other, Skyworks is expanding sales to customers in the automotive, medical and industrial sectors, where profits are higher, product life cycles are longer and competition is less intense.

Finally, the recent pullback in the stock has made it undervalued. With earnings per share (EPS) expected to jump 25% to $5.65 in 2016, Skyworks’ 12.84 trailing price-to-earnings ratio is miniscule. With a projected five-year EPS growth rate of 22.1%, its Price/Earnings-to-Growth ratio of 0.48 is also tiny.

So buy Skyworks (SWKS) at market, today and place your stop at $47.00.

If you want to play the options, I recommend the SWKS May $65 (SWKS160520C00065000) calls, which last traded at $5.00 and expire on May 20.

Portfolio Update

Direxion Daily CSI 300 China A Share Bear ETF (CHAD) fell 7.80%. Market exchanges were closed last Monday, creating a four-day trading week in celebration of President’s Day. Nevertheless, CHAD dipped on Tuesday and remained near the $47.50 price level for the rest of the week. Rising oil prices, in response to talks between Saudi Arabia and Russia, put a temporary halt to China’s recent gradual fall. CHAD traded sideways just above the 50-day moving average (MA) last week and remains a BUY.

Phillips 66 (PSX) added 6.50%. More and more investors appear to be piling into PSX as news of Warren Buffett’s buying activities continue to “ring the dinner bell” for traders. JP Morgan also lists PSX on a short list of stocks with good momentum and reasonable prices. PSX moved above the 50-day MA and is now a BUY.

Kinder Morgan (KMI) gained 11.78% during its first week in your portfolio. The “big guns” in the market have been training their sites on oil as of late, and many are starting to pull the trigger. Analysts at Canaccord Genuity believe that even the talk of big oil producers discussing meetings to stabilize oil prices could be enough to push a rally in oil markets. KMI is a BUY.

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Sincerely,

Nicholas A. Vardy