Paul Meeks—the investor known for running the world’s largest tech fund during the late 1990s—was out with a warning this week for the sector that made him a legend.
“You have to play it within the sector as defensively as possible,” Meeks, who now is the portfolio manager at Independent Solutions Wealth Management, said.
Meeks’ primary concern for the group now is rising rates.
“I just worry about the increased rise in rates,” he said. “I need to see at least the 10-year [Treasury Note] stabilize for a while.”
The 10-year yield rose as high as 1.754% on Thursday after President Joe Biden announced a sweeping multi trillion-dollar infrastructure and economic recovery plan, including spending on transportation, broadband, and affordable housing. It hit a 14-month high earlier this week and has been rising rapidly in recent months on inflation fears after starting the year at less than 1%.
But even with rates on the rise, Meeks says there’s one corner of the tech sector that still looks like a solid bet now.
“I do like semiconductors,” Meeks, who has been bullish on the group since last June. “A semiconductor should be relatively defensive. Strong fundamentals. Everybody knows that there’s a voracious demand for a lot of chips, and scarce supply.”
So which stocks in the semiconductor space does Meeks likes now?
Over the long-run, the storied investor likes Analog Devices (NASDAQ: ADI), NXP Semiconductors (NASDAQ: NXPI), and Texas Instruments (NASDAQ: TXN). But his top pick is Microchip Technology (NASDAQ: MCHP).
“There are opportunities there,” Meeks added. “That’s what I would do if you have to be in the tech sector at all.”
Longbow Research analyst Nikolay Todorov upgraded both Microchip and Texas Instruments to Buy in a note last week, issuing price targets of $186 and $220, respectively, noting that semiconductors appear to be in the “middle innings” of a cycle where the gap between demand and supply is unlikely to close in 2021.
Todorov wrote that Microchip should see “earnings upside from incremental GM and op leverage, and multiple re-rating to in-line with peer avg. (from 10% discount today) driven by balance sheet deleveraging and scaling of shareholder return initially via rapidly growing dividend and later by market buybacks.”
As for Texas Instruments, Todorov said, “We think the combination of higher product availability, and now more direct-to-consumer sales (63% of 4Q sales were direct vs less tan 40% a year ago), will make TI more nimble and allow it to pick incremental share near term.”