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After losing nearly 40% if its value in a few short months, the Philadelphia Semiconductor Index ($SOX.X) has rebounded nicely in April, climbing by an impressive 9%. As an investor in unloved, undervalued companies, this is the type of recovery action that I like to see in a group.
A stronger-than-expected quarter by industry giant Intel (INTC, news, msgs), and hope that the economic downturn won't run too deep or too long, fueled the bargain hunting. Short-covering also contributed to the relief rally.
While I still think the economy could be in for some rough sledding over the next six to nine months, I'm going to dip my toes in the sector as well -- adding 500 shares of graphics chip giant Nvidia (NVDA, news, msgs).
Nvidia is a perfect fit for the Dog Pound. The stock is down 50% from its October high despite solid earnings prospects, strong management and a clean balance sheet. In fact, the company is sitting on about $3.26 a share in cash with no debt. Backing that cash out, you get a forward price-to-earnings ratio of 10, with a long-term projected growth rate of 16%, for an extremely attractive price/earnings-to-growth ratio of 0.63.
Assuming a relatively conservative PEG of 1, NVDA has upside to the $26-$27 area. If macro conditions improve and the company continues to win share in the graphic-chip business, it's very likely that upside will be considerably greater. Nevertheless, a gain of 30%-plus in this turbulent marketplace is enticing enough.
As for the rest of the Dog Pound portfolio, I'll stand pat. Goldman Sachs (GS, news, msgs) ran nicely after being added last week, and TradeStation Group (TRAD, news, msgs) is well-positioned for a recovery rally as it is an attractive acquisition target at its currently depressed price.
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