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Investment Ideas

The semiconductor industry is known as one of the most volatile sectors in the stock market. 2016 was proof of exactly that, after wild trading led to huge moves in the iShares PHLX Semiconductor ETF (SOXX - Free Report) .

After a 15% move lower in January, the ETF is now up over 50% from its 2016 lows and up over 25% for the year.

The reason for the big moves stems from general market volatility seen in early 2016. Most of the semis where beating down over fear of a global slowdown that never came about. Additionally, the sector has witnessed impressive earnings from leaders in the industry, causing stock prices to rise across the board. This earnings growth has helped the sector as a whole and helped individual stocks surge to all-time highs.

Below I examine four semiconductor stocks that are surging to 2016 highs. The sector is broken into smaller industries within the Zacks Industry Rank, but all stocks mentioned are ranked in the top 20 out of 265 (Top 6%) in the Zack Industry Rank.

Nvidia (NVDA - Free Report) is a Zacks Rank #1 (Strong Buy) that designs, develops and markets a top-to-bottom family of award-winning 3D graphics processors, graphics processing units and related software. The  Santa Clara, California company has over 9,000 employees and was founded in 1993.

Nvidia has a market cap of $50 billion and a forward PE of 38. The company sports a Zacks Style Score of “A” in Momentum, but “F” in Value. The monster run in the stock has some investors concerned that the stock has gone too far. However, looking at the recent earnings and estimates, there is reason to believe the run can continue.

Earlier this month, the company reported Q3 earnings of $0.94 versus the $0.57 expected, with revenues coming in at $2.00 billion versus $1.68 billion. The company also raised its dividend 22% and issues $2 billion in stock buybacks.  In addition to the 45% beat, the company guided higher, forcing analyst to raise estimates.

Analysts are in 100% agreement on which way estimates are going, higher. Estimates for fiscal year 2017 have jumped 33% in the last month, from $1.86 to $2.48. For 2018, there has been revisions higher of 43%, from $1.93 to 2.77.

The stock has seen one of the better moves of 2016, so it is understandable if investors don’t want to chase. However, any significant pullback should be bought due to the company’s long-term earnings prospects.

Marvel (MRVL - Free Report) is a Zacks Rank #1 (Strong Buy) that is a leading designer, developer and supplier of mixed-signal and digital signal processing integrated circuit for high-speed, high-density, digital data storage and broadband digital data networking markets.The Bermuda-based company employs over 5,000 and was founded in 1995.

Marvel has a market cap of $8 billion and a forward PE of 80. Their expected EPS growth is 16.5% and pays a dividend of 1.6%.

The company reported earnings on November 17th, beating on both the top and bottom line. On top of the 200% beat on EPS the company guided higher. The stock responded very well, shooting up almost 15% in one day.

Since earnings there have been multiple price upgrades from analysts including:

Barclays reiterates Equal Weight, ups PT to $14 from $12.

Susquehanna to Net Positive.

Jefferies reiterates Hold and ups to $16 from $13.

JPMorgan raised to $15.50 from $13. 

KLA-Tencor (KLAC - Free Report) is a Zacks Rank #2 (Buy) that is a leading supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company is out of Milpitas, California and employs over 5000.

KLAC has a market cap of $12.5 billion and forward PE of 15. The stock sports a Zacks Style score of “B” in Value and Growth. The company also pays a 2.70% dividend.

They reported earnings in October with a 9.43% beat and a raise in guidance. On the conference call the company guided Q2 higher and lifted their revenues expectations as well.  

Looking at the estimates over the last month, revisions are headed higher across all time frames. Including a revision higher of 11% for the current quarter, from $1.26 to $1.40.

Lam Research (LRCX - Free Report) is a Zacks Rank #1 (Strong Buy) that designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. The company was founded in 1980 in Fremont, California and now has almost 8,000 employees.

Lam has a market cap $17 billion with a forward PE of 14. It sports Zacks Style Scores of “B” in Growth and Value. The company pays a dividend of 1.15% and has an expected 3-5 year EPS growth rate of 10%.

Last week the company issued fiscal year 2017 and 2018 EPS guidance of $8.00-9.00. The company also announced a $1 billion stock buyback and raised the dividend 50%. The stock has responded very well since, rallying almost 6%.

Analysts have been aggressively raising estimates for the company over the last month. For the current fiscal year Lam has seen estimates tick up to $7.58 from $7.01, an 8% move higher.

Lam has beat on EPS 17 quarters in a row, a streak that has moved the stock over 300% higher in three years. The company will next report January 25th, look for the them to beat once again.

In summary

The semiconductor sector is one of the hottest out there in a market that is about to break out. Some of these stocks have made their runs already so investors must take caution they aren’t chasing the move. Stick with the top ranked stocks using the Zacks Rank in order to separate yourself from stocks who’s runs might be over.  

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