The Nasdaq gained for the third consecutive trading day on Tuesday. The index gained 0.4%, as 84 of its components reached a 52-week high. Overall, the index gained the most among the benchmark indexes. These are indications that the technology heavy index has somewhat overcome recent volatility.
Volatility in High Growth Tech Stocks
The technology sector has gained significantly during the first half of 2014. However, this is not true for all tech stocks. Declines in high-growth tech stocks had a negative impact on Nasdaq of late. For instance, shares of Amazon.com Inc. (AMZN - Analyst Report) plunged 9.9% on Apr 25 due to the second-quarter operating loss forecast. The Nasdaq dropped 1.8% on the same day.
At the beginning of the second quarter of 2014, investors dumped favorites like Twitter, Inc. (TWTR - Analyst Report), Groupon, Inc. (GRPN - Analyst Report) and Yelp, Inc. (YELP - Snapshot Report) on rising concerns about fundamentals.
The share price movement of momentum stocks often lacks justification. The fundamentals of these stocks do not always support their lofty valuations. Nevertheless, short-term investors have found them attractive for their ability to deliver strong returns.
Rise of Semiconductors
The sell-off that started from late March puts the focus back on value investing. Though most of these stocks have recovered from the losses made during March and April, interest in older tech stocks has been renewed.
This is best borne out by the advance of semiconductor stocks. While the Nasdaq has gained 4.69% this year, the Technology Select Sector SPDR ETF (XLK - ETF report) has gained 8%. On the other hand, the iShares PHLX SOX Semiconductor Sector ETF (SOXX - ETF report) has gained 20.78% during the same period.
SOXX is the largest semiconductor ETF which tracks 31 semiconductor companies and has $460 million invested in it. The reason for the popularity of semiconductor stocks is the fact that many of them are older and proven companies. High levels of demand have led to encouraging earnings and significant increases in share prices for the likes of Intel Corporation (INTC - Analyst Report) and Micron Technology Inc. (MU - Analyst Report).
The consumer and computing markets remain the most important, but because of the gradual convergence of functionalities, it is growing increasingly difficult to identify which devices are computing and for which type of consumer. Semiconductors are spurring this change, facilitating the convergence.
Taken together, these factors indicate a positive period for semiconductor stocks going forward. Below we present three stocks which possess the potential to grow in such an environment, each of which also has a good Zacks rank.
Advanced Semiconductor Engineering Inc. (ASX - Snapshot Report) is an independent provider of semiconductor packaging services and semiconductor testing services, including front-end engineering testing, wafer probing and final testing services. The company offers packaging and testing services separately and on a turnkey basis.
Turnkey services consist of integrated packaging, testing and direct shipment of semiconductors to end users designated by customers. The company is able to expand the traditional scope of turnkey services to offer total semiconductor manufacturing services to customers.
Advanced Semiconductor Engineering Inc. holds a Zacks Rank #2 (Buy) and has expected earnings growth of 15.79%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 14.45.
Integrated Silicon Solution Inc. (ISSI - Snapshot Report) designs, develops and markets high performance memory devices. These include static random access memory, low and medium density dynamic random access memory, and nonvolatile memory, as well as voice recording devices and certain microcontrollers and embedded memories.
Their memory devices are used in networking applications, telecommunications, data communications, disk drives and other peripherals, personal computers, office automation, instrumentation and consumer products.
Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 12.9%. It has a P/E (F1) of 20.59.
Avago Technologies Limited (AVGO - Analyst Report) is a premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems.
Avago is currently the 9th largest semiconductor company (excluding memory business) in the world, focusing primarily on products that are developed from the 3rd and 5th groups in the periodic table of chemical elements.
Apart from a Zacks Rank #1 (Strong Buy), Avago has expected earnings growth of 25.94%. It has a P/E (F1) of 21.56.
Older tech stocks and semiconductors in particular are offering better value in the current scenario. This is why you do well to choose these stocks.