I told my followers in March to buy the decline to S&P 2325 for a very simple reason: the pullbacks would be shallow because fundamentals were strong and fund managers were under-exposed to the rally since November.
Not only has the robust economic data been displaying a resiliency to any concerns about rising interest rates, but Q1 earnings are poised to deliver the highest profit gain of any quarter since 2011.
And so that’s why I’ve also been stating that a test of S&P 2300 has a good chance -- say 2 in 3 -- of marking the low in April. At worst, in my view, a 6% pullback from the peak at 2400 down to stronger support in the 2250-75 zone is what we should expect from this market and its very small wall of fundamental and valuation worries.
So, given this optimistic backdrop, what should investors do with ready cash? Two words: Buy Technology. This dynamic sector -- which drives most economic innovation -- is the least dependent on or impacted by any policy out of DC.
Prepare Your Tech Shopping List During April Showers
I’ve got a long list of technology names I’m focused on across many industries from software and services to hardware and chips. And I’m checking it twice a day to see which I like best and which are nearing my buy zones.
Not surprisingly, many of them are in the semiconductor industries. So while I didn’t intend for this to be an “all the chips” theme, it happens that three of my top Zacks #1 Rank picks are from that well of gushing profits.
And even though the Philadelphia Semiconductor Index (SOX) was up a blistering 12% on the year in March, reflecting large investor appetite for that growth, the run is not over this year. Any 5-10% correction should be bought because global technology cycles are still driving enterprise cap-ex and earnings for computer and communications equipment of all kinds.
As of Tuesday April 11, the SOX is up only 8.5% YTD and the buying opportunities are starting to pop up.
My 3 Chips for the Dips
Here are three tech stocks each still possessing good upside potential in this cycle -- upside that you can enhance by getting a good edge on your entry. I give “good edge” buy zones for each.
Broadcom Limited (AVGO - Free Report)
This $88 billion “arms dealer” to both enterprise wired infrastructure customers and wireless smartphone makers and networks is the most diversified “chip stock” of the bunch.
I've been recommending and swing trading AVGO since 2014 and $70, from where it has more than tripled. The stock has consistently claimed the top tier of the Zacks Rank every quarter as analysts keep raising top and bottom line estimates.
In the middle of their Q2 of the current fiscal year ending in October, Broadcom is expected to grow sales by 28% and profits by 32%.
Buy AVGO between $200 and $210. And if the corrective action for tech stocks heats up, grabbing any shares near $190 should offer an excellent risk/reward play.
Applied Materials (AMAT - Free Report)
AMAT makes semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Customers for these products include wafer manufacturers and semiconductor integrated circuit (IC) manufacturers, who either use the ICs they manufacture in their own products or sell them to other companies.
I've been writing about AMAT since December as a great Bull of the Day to scoop up in the mid-$30s. Also in the midst of its Q2 of FY17 (ending October), AMAT is projected to advance the top line by 22% and profits by 51%.
Buy AMAT between $36 and $37 for the best edge. More aggressive investor-traders can begin building positions on dips under $38.
Analog Devices (ADI - Free Report)
Analog Devices is one of the world leaders in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing integrated circuits used in signal processing applications.
Applications for its products include communications, cellular telephones, computers and computer peripherals, consumer electronics, automotive electronics, factory automation, process control and military and space systems.
On the same October 2017 fiscal year, ADI is expected to deliver growth of 42% on the top line and 32% on the bottom.
Buy ADI between $74 and $77. On Tuesday, shares dipped just under $77 and are below their 60-period VWAP (volume-weighted moving average). I expect more pressure until a test of support in the $74-75 area.
Bonus Play: Just One More Chip
Lam Research (LRCX - Free Report)
This Zacks #2 Rank is very similar to AMAT in terms of products and customers served, concentrating on front-end wafer processing equipment used in the fabrication of integrated circuits. The company's precision products are used in different capacities to etch away portions of various films to create an integrated circuit.
In the middle of its June fiscal year, LRCX is projected to produce revenue growth of 33.4% and an earnings advance of 46.6%. Analysts at Pacific Crest recently raised their price target on shares to $163 while boutique investment bank Stifel Nicolaus hiked theirs to $150.
Buy LRCX between $120 and $125. The VWAP is down just under $120 and I expect institutional buyers to be active well before then. We first bought LRCX on the last dip under $115 and are back in the shares now.
Bottom Line on the Chips: Obviously, you don't want to buy all 4 of these semiconductor stocks for portfolios of under 20 names. But 2 or 3 of them would be pretty smart for a stable of 20+. I'm certainly looking forward to the opportunities to grab some more chip exposure at attractive levels again.
Disclosure: I own LRCX shares for the Zacks TAZR Trader.
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