New Trade for June 13th, 2023

Stocks ticked higher this morning amid hopes that the Fed will announce a break in interest rate hikes tomorrow at the conclusion of this week’s policy meeting. According to CME Group’s FedWatch tool, 78% of traders bet on a pause. That said, another hike in July isn’t out of the question. 

With the Nasdaq Composite and the S&P 500 now at their highest level in thirteen months, many investors are searching for stocks that still have room to run. Exciting investment opportunities sometimes lie in plain sight. Today’s recommendation is a deeply undervalued technology name from the S&P 500.  

ON Semiconductor Corp (ON)

Semiconductor giant Onsemi is firing on all cylinders with a large market footprint in exciting growth sectors like automotive computing. ON share price is up nearly 300% in the three years since the summer of 2020, and revenue has grown 28.3% over the past twelve months. The US-based chipmaker has solidified its reputation as a top player among its auto/industrial peers. However, several factors support the case that plenty of runway is left for this bet on an electric future.  

Following ON’s stellar performance of the past few years, the stock still looks undervalued at just 18x 12-months forward earnings. It’s currently one of the cheapest tech names in the S&P 500.  

Onsemi recently initiated a $3 billion share repurchase plan at its final 2022 financial update. The new shareholder return policy is good through 2025. Management targets about 50% of free cash flow to be returned to stockholders each year. If the company uses up all $3 billion in authorized buybacks through 2025, that would equate to nearly 10% of the current market cap or roughly 3% a year in cash returns to shareholders over the next three-year stretch.  

Bank of America sees ON as a top-3 global/top US vendor of smart power and sensing chips for EVs, and they’re alone. Onsemi holds a highly attractive 1.37 (overweight) rating from the Wall Street pros who cover it.  

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