Where do you see buying opportunities within your semiconductor sector coverage?

Over the past month or so, we have issued Buy reports on four companies: Tessera (TSRA), Intellon (ITLN), O2Micro (OIIM) and Ultra-Clean (UCTT). All of these companies supply to original equipment manufacturers (OEMs), or are OEMs themselves, for the semiconductor industry.

Not necessarily household names, however.

Well, but that's because they do not have big market caps. But they all stand to benefit from the ongoing resurgence within the semiconductor upcycle.

Tessera's advanced packaging technologies, for instance, have industry-wide application. Its licensing business has very attractive operating leverage characteristics. Also, the firm has won five major lawsuits and now receives royalties from all of the big four in the DRAM (memory) market: Samsung, Micron (MU), Infineon (IFX) and Hynix. The company has licensing agreements with Samsung and Hynix, which together have almost a 50% market share.

The stock is currently trading at a 13.7x multiple of our 2009 earnings estimate (P/E). Considering the company's market strength, we expect solid revenue and earnings growth to continue. The company receives royalty on approximately 80% of the DRAM market, which should be a catalyst going forward.

Because this company is involved in lots of copyright litigation, doesn't this create additional risks?

We acknowledge concerns over increased litigation costs and the potential for large swings in revenue caused by large irregular settlement payments, but these concerns have created this attractive entry point in the share price. We would be more concerned with rising litigation costs if the company were not winning most of the cases.

We recommend the purchase of this stock for investors that have a time horizon greater than two quarters.