Shares of PMC-Sierra Inc (NASDAQ:PMCS) jumped by 11% in the waning minutes of trading on Thursday afternoon after sources revealed that the semiconductor maker would attempt to sell itself. Shares have given back some of those gains this morning, sliding by 2.35%. PMC-Sierra is said to be seeking a company to take it over, rather than a private equity firm to take it private.
A sale to a tech company looking to expand its footprint in China would make a lot of sense, as PMC-Sierra Inc (NASDAQ:PMCS) does approximately 40% of its business, in terms of revenues, in the country. Susquehanna talked up the company’s business in China in a report yesterday, in which it upgraded PMC-Sierra to ‘Positive’ from ‘Neutral’ and raised its price target on the firm to $11 from $7, noting that China’s datacenter spending is expected to increase by 30% over the next year, and that one of PMC-Sierra’s clients holds a 60% share of the PCI-e SSD market there. Nomura Securities also speculated that Taiwan’s MediaTek Inc could be an interested party given its desire to jump into the Solid State Drives (SSD) market.
The news and spurt in the stock comes just a couple of weeks after we pegged PMC-Sierra Inc (NASDAQ:PMCS) as a stock under $10 that was poised to explode, given the exuberant smart money ownership of the company. 27 elite investors in our database held $664 million of the company’s stock, accounting for 39.30% of its outstanding stock, and that was even before billionaire investing icon George Soros’ family office made a big addition to its position, adding 4.63 million shares to its holding in early-September.
Whether elite hedge funds collectively like a stock or not is an important metric to consider, as these large investors like Soros show a great level of skill and expertise when it comes to picking stocks. Over the last few years equity hedge funds have trailed the market by a large margin, but that’s mostly due to their hedging and short positions, which perform poorly in a bull market. Their long positions performed far better, especially their small-cap picks, which have the potential to beat the market by 95 basis points per month on average, as our backtests showed. Our small-cap strategy involves imitating a portfolio of the 15 most popular small-cap picks among hedge funds and it has returned 118% since August 2012, beating the S&P 500 by over 60 percentage points (read more details here).
Given the company’s plans to attempt a sale, which would likely deliver a healthy premium to shareholders, as well as its improving prospects even should a sale fail to materialize, we believe it’s a great time to buy PMC-Sierra, especially on the unexpected give-back today.