Is the Incredible Run for Semiconductor Stocks Over?

After an abysmal 2015 that saw iShares PHLX Semiconductor ETF SOXX lose over 3.3%, stocks across the semiconductor landscape rebounded well last year. Notably, the ETF, which represents semiconductor stocks, witnessed a gain of approximately 36.6% in 2016, while the Technology Select Sector SPDR ETF XLK, which represents the overall technology sector, returned 12.9%.

The momentum continued with SOXX ETF witnessing a gain of 11.5% in the first three months of 2017, higher than XLK ETF return of 10.2%.

However, a negative divergence has emerged this month, with the semiconductor ETF declining 3.9% in April so far. This is because out of the total 30 components in this benchmark exchange-traded fund, the five biggest companies lost momentum this month.

The five heavyweights – NVIDIA NVDA, Intel INTC, Broadcom AVGO, Texas Instruments TXN and Qualcomm QCOM – which together constitute over 40% of the SOXX ETF weightage, declined 8.9%, 1.7%, 2.4%, 2.3% and 7.7%, respectively, in April so far.

The negative divergence seen in April has now raised a question in investors’ minds – Is the incredible run for semiconductor stocks over?

No, Certainly Not

In our opinion, the overall decline is temporary. Most heavyweights have either internal issues or higher valuations which dragged down their share prices.

Such as, investors may be worried over NVIDIA and Intel’s near-term performances due to Gartner’s cautious forward-looking prospects of the PC industry. The research firm stated that the surge in DRAM prices and short supply of SSD will escalate PC prices, which might hurt the overall demand.

However, we believe that the Gartner’s recent predictions will be more concerning for Intel rather than NVIDIA, as the former’s business is more reliable on PC sales. On the other hand, over the years, NVIDIA diversified its business from providing graphic chips to PC vendors to offering technologies to gaming, datacenter and automotive industries. Moreover, currently, NVIDIA carries a Zacks Rank #3 (Hold), while Intel has a Zacks Rank #4 (Sell).

The decelerating momentum in Qualcomm may be due to some regulatory troubles. The company was charged with fines due to unfair business practices and licensing royalty payments. In addition, aggressive competition in the mobile phone chipset market has been hurting Qualcomm’s profits. The stock currently carries a Zacks Rank #4.

In case of Broadcom and Texas Instruments, we believe the recent plunge in prices may be due to profit bookings rather than any internal issues. Both companies currently trade at a premium based on their respective forward earnings estimates. However, both companies have buy ratings at present, with Broadcom sporting a Zacks Rank #1 (Strong Buy) and Texas Instruments carrying a Zacks Rank #2 (Buy).

Industry to Retain Growth Momentum in 2017

Given the recovery in the U.S. economy, as evident from improved economic data for GDP, Consumer Confidence Index, unemployment rate and factory activity data, we believe that semiconductor stocks have significant growth opportunities in 2017. We believe that like last year, the semiconductor industry will witness a remarkable run.

The latest predictions from World Semiconductor Trade Statistics (WSTS) on semiconductor sales also boost our confidence on this industry space. The WSTS predicts semiconductor sales to increase 3% in 2017 and 2% in 2018.

Zacks Methodology Also Favors

The Zacks Industry Rank is a very good indicator of investment opportunities within an industry, at any given time. Moreover, because stocks in the same industry have certain common positive or negative factors affecting them, it has been observed that even companies with a neutral Zacks Rank, when part of an industry with a “Positive” outlook, will perform better than similar-ranked stocks in industries with “Neutral” or “Negative” outlooks.

The semiconductor industry is made up of 15 sub-sectors (including four for semiconductor equipment) within the Technology sector, which is one of the 16 broad Zacks sectors.

Similar to the Technology sector, Zacks also breaks down each of the other sectors into groups such that there are a total of 265 sub-sectors or industries. These industries are then ranked based on the average rank of companies comprising the industry.

Per Zacks methodology, the outlook for industries positioned #88 or lower is Positive, between #89 and #176 is Neutral, and #177 and higher is Negative.

Applying this methodology we found that currently nine of the semiconductor segments are now in the positive territory, four in the neutral and only two are in the negative territory.

This proves that the industry still has huge growth potential and therefore, investors should look for quality stocks in this space.

Some Hot Picks From the Industry

Right now, the semiconductor segment has several promising stocks to choose from. Here we have picked four semiconductor stocks that have performed well in this year so far and have the potential to keep the momentum alive in the year ahead. They also have a favorable Zacks Rank #1 or #2 as well as VGM Style Score of ‘A’ or ‘B.’ You can see the complete list of today’s Zacks #1 Rank stocks here.

Micron Technology MU currently flaunts a Zacks Rank #1 and has a VGM Style Score of ‘A.’ The stock falls under the Semiconductor Memory segment which also carries a Zacks Industry Rank #1. So far this year, Micron has gained 23.6%.

STMicroelectronics N.V. STM currently carries a Zacks Rank #2 and has a VGM Style Score of ‘A.’ The stock falls under the Semiconductor – General segment which has a Zacks Industry Rank #49. So far this year, STMicroelectronics has gained 30.9%.

Lam Research LRCX currently carries a Zacks Rank #2 and has a VGM Style Score of ‘A.’ The stock falls under the Semiconductor Equipment – Wafer Fabrication segment which has a Zacks Industry Rank #13. So far this year, Lam Research has gained 20.4%.

Applied Materials AMAT currently carries a Zacks Rank #2 and has a VGM Style Score of ‘B.’ The stock falls under the Semiconductor Equipment – Wafer Fabrication segment which has a Zacks Industry Rank #13. So far this year, Applied Materials has gained 17.8%.

Looking Ahead

The above mentioned stocks have grabbed the spotlight, with striking performances supported by solid earnings results and strong growth projections. With this in mind, we believe investing in these stocks would yield strong returns for your portfolio in the short term.

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QUALCOMM Incorporated (QCOM): Free Stock Analysis Report
 
Broadcom Limited (AVGO): Free Stock Analysis Report
 
SPDR-TECH SELS (XLK): ETF Research Reports
 
ISHARS-PHLX SEM (SOXX): ETF Research Reports
 
STMicroelectronics N.V. (STM): Free Stock Analysis Report
 
Intel Corporation (INTC): Free Stock Analysis Report
 
Texas Instruments Incorporated (TXN): Free Stock Analysis Report
 
NVIDIA Corporation (NVDA): Free Stock Analysis Report
 
Micron Technology, Inc. (MU): Free Stock Analysis Report
 
Lam Research Corporation (LRCX): Free Stock Analysis Report
 
Applied Materials, Inc. (AMAT): Free Stock Analysis Report
 
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