Semiconductors Still Strong

Industry Rank Analysis 2-15-11

I have written about this group before in this column, but they still look good. We currently have a ten-way tie for first place in the Zacks Industry Rank. Five of those are either semiconductor firms, or the firms that make the gear to make semiconductors.

None of these “industries” are all that big based on the number of firms. The largest is the semi-equipment/wafer fabrication industry, with eight firms; the other four “industries” all have either one or two firms in them. Each of these industries has an average Zacks rank of 2.00.

In addition to the five semi and semi-equipment “industries" in the tie for first place, two other related industries also show up well. The scientific instruments industry (lots of scientific instruments are used in the production of semiconductors) and the electronic test equipment industry (the chips all have to be tested before they are shipped) also show up very well in the industry rank, the instruments in 13th place with an average score of 2.18 and the test equipment industry in 19th place with an average score of 2.29.

The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well -- a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts. It is interesting when you see a cluster of similar industries at the top of the list.

The same holds true for the bottom of the list. It is even more interesting when you have three large industries, all from the same area, that are clustered together near the top or the bottom. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the “industry.” 

Semiconductors are essentially the raw material/basic building blocks for all technology. Not just the obvious tech things like computers and smart phones, but chips find their way into almost every manufactured product today. Your average compact car today has more computing power embedded in it than did the Apollo 11 space capsule. The strength of the semiconductor industry on the Zacks rank is thus a very hopeful sign for the economy, both here and overseas.

The first table semiconductor and related stocks that hold the vaunted Zacks #1 Rank (Strong Buy). The second table shows the Zacks #2 Ranked (Buy) firms. Most of the stocks are small caps, and even micro caps. There is a fair representation of mid cap stocks as well, and two large caps, so there should be something for everybody, at least in terms of company size.

Valuations are a bit on the high side based on current fiscal year earnings (mostly 2011) but if you are willing to look out to next year, become much more reasonable.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Asml Holding Nv	ASML	$18,962	10.6	11.64	22.43%	33.57%	$43.54
Natl Instrs Cp	NATI	$3,644	27.17	22.91	7.30%	7.30%	$46.59
Varian Semi	VSEA	$3,373	11.22	11.13	27.27%	19.55%	$45.60
Teradyne Inc	TER	$3,269	10.3	8.94	26.76%	23.62%	$18.02
Intl Rectifier	IRF	$2,290	16.1	14.34	16.48%	15.07%	$33.00
Coherent Inc	COHR	$1,478	19.86	17.54	21.68%	23.90%	$59.03
Fei Company	FEIC	$1,206	17.51	15.08	24.90%	28.72%	$31.54
Mts Systems	MTSC	$672	18.24	16.95	22.37%	17.02%	$43.90
Adv Energy Inds	AEIS	$664	9.94	8.17	1.23%	0.25%	$15.34
Caliper Life Sc	CALP	$335	285	55.42	N/A	60.00%	$6.65

Number 2 Ranked Stocks

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Taiwan Semi-Adr	TSM	$67,047	12.66	12.88	1.39%	8.06%	$12.94
Ametek Inc	AME	$6,996	21	18.47	1.79%	1.53%	$43.71
Mettler-Toledo	MTD	$5,485	21.52	19.31	3.06%	2.43%	$167.11
Bruker Corp	BRKR	$3,084	20.85	17.62	1.70%	1.92%	$18.71
Ezchip Semi Ltd	EZCH	$754	25.21	16.04	5.78%	N/A	$30.00
Newport Corp	NEWP	$619	12.71	12.34	6.79%	13.75%	$16.85
Photronics Inc	PLAB	$454	14.3	12.99	7.31%	0.00%	$8.40
Measuremnt Spcl	MEAS	$424	16.52	14.32	1.15%	2.27%	$29.00
Iris Intl Inc	IRIS	$188	30.17	27.26	0.00%	0.00%	$10.36

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php

Read the full analyst report on NATI

Read the full analyst report on AME

Read the full analyst report on TSM

Read the full analyst report on MTD

Read the full analyst report on ASML