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Wall Street May Have Factored in a Likely Hawkish Fed: 5 Picks

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Wall Street has overcome Omicron-led fluctuations, at least for the time being, thanks to early data that shows that the new variant of the coronavirus may not be as severe as Delta. Market participants are now more concerned regarding a likely shift in Fed’s stance toward more hawkish policies. It seems that a likely change in the central bank’s monetary policies has already been incorporated in U.S. stock markets’ valuation.

At this stage, it will be prudent to invest in technology stocks, especially from the semiconductor industry, with a favorable Zacks Rank that have popped in the past month, defying severe market volatility. The semiconductor industry has strong potential as the global chip shortage persists. Our five picks are NVIDIA Corp. (NVDA - Free Report) , Xilinx Inc. (XLNX - Free Report) , QUALCOMM Inc. (QCOM - Free Report) , Lam Research Corp. (LRCX - Free Report) and ON Semiconductor Corp. (ON - Free Report) .

Markets Likely Factor In a Fed Policy Change

On Nov 30, in his testimony before a Senate committee, Fed Chairman Jerome Powell said that the central bank will discuss speeding up the tapering process of its quantitative easing program in the upcoming FOMS meeting scheduled from Dec 14-15.

Powell said “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.” The Fed Chair also got rid of his long-used “inflation is transitory” remark.

In the November FOMC meeting, the Fed decided to start tapering its bond-buy program at the rate of $15 billion per month effective November. At this speed, the bond-buying program should have ended in June 2022 and the first hike in the benchmark interest rate since March 2020 was likely in the second half of next year.

However, Powell’s latest statement has indicated that the first rate hike is likely to come in the second quarter of 2022 as the central bank is expected to double its tapering amount to $30 per month from December. Market participants are currently expecting three rate hikes of 25 basis points each in 2022.

A higher interest rate seems detrimental for growth stocks, like from the technology space, as a higher discount rate will reduce the net present value of the investment in growth stocks. Growth stocks are expected to provide higher returns over a longer period. Moreover, these companies depend on easy access to cheaper credit in order to grow their businesses.

However, the tech-heavy Nasdaq Composite has gained 1.6% so far in December. The Technology Select Sector SPDR (XLK) — one of the 11 broad sectors of the market’s benchmark the S&P 500 Index — has advanced 2.7% month to date.

Budgetary Support to the Semiconductor Industry

The White House has put pressure on Congress to quickly pass legislation providing $52 billion over five years to help computer chip manufacturers and ease a shortage of the components vital to many industries.

The government is concerned that the United States had a 37% share of the global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12% as of now. Consequently, U.S. businesses, especially the auto and high-tech industries are suffering from an acute shortage of chipsets owing to the breakdown of the global supply chain during the pandemic.

Our Top Picks

We have narrowed our search to five large-cap (market capital > $25 billion) semiconductor stocks that have popped in the past month defying volatility. These stocks have strong growth potential for the rest of 2021 and have witnessed positive earnings estimate revisions in the past 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past month.

Zacks Investment ResearchImage Source: Zacks Investment Research

NVIDIA is benefiting from the coronavirus-induced work-from-home and learn-at-home wave. NVIDIA is also benefiting from strong growth in GeForce desktop and notebook GPUs, which is boosting gaming revenues. Moreover, a surge in Hyperscale demand remains a tailwind for NVIDIA’s Data Center business.

The expansion of NVIDIA GeForce NOW is expected to drive its user base. Further, the solid uptake of AI-based smart cockpit infotainment solutions is a boon. The collaboration with Daimler-owned Mercedes-Benz is expected to further strengthen NVIDIA’s presence in the autonomous vehicles and other automotive electronics spaces.

Zacks Rank #2 NVDA has an expected earnings growth rate of 73.2% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 4.6% over the past 30 days. The stock price of NVIDIA has advanced 8% in the past month.

ON Semiconductor is seeing strengthening demand across most end markets as evident from its booking trends over the last few quarters. ON Semiconductor continues to gain traction among electric vehicle manufacturers for both silicon carbide and insulated-gate bipolar transistor-based products.

ON Semiconductor has a well-diversified business generating a significant percentage of revenues from each of the computing, consumer, industrial, communications and automotive end markets.

Zacks Rank #1 ON Semiconductor has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 12.5% over the past 60 days. The stock price of ON Semiconductor has surged 13% in the past month.

Qualcomm is well-positioned to benefit from a solid 5G traction with greater visibility to meet its long-term revenue targets. For calendar-year 2021, 5G handsets with Qualcomm chips are expected to witness 150% year-over-year growth at the midpoint to about 450-550 units.

Qualcomm has raised the bar for driverless cars with the launch of the first-of-its-kind automotive platform — Snapdragon Ride — which enables automakers to transform their vehicles into self-driving cars using AI.

Zacks Rank #2 QCOM has an expected earnings growth rate of 22.8% for the current year (ending September 2022). The Zacks Consensus Estimate for current-year earnings has improved 1.5% over the past 30 days. The stock price of QUALCOMM has climbed 14.3% in the past month.

Lam Research has high exposure to the memory segment, which is likely to see tremendous growth over the next few years. The strength is driven by cloud computing, big data, mobile devices and the Internet of Things. Technological advancements in the areas of multi-patterning, 3D device architecture and advanced packaging technologies are driving LAM.

Lam Research has been benefiting from the transition to the new data-enabled economy, wherein DRAM and NAND are continuously gaining from density growth. However, uncertainty due to the coronavirus outbreak remains a concern.

Zacks Rank #2 LRCX has an expected earnings growth rate of 25.9% for the current year (ending June 2022). The Zacks Consensus Estimate for current-year earnings has improved 2.5% over the past 60 days. The stock price of Lam Research has jumped 17.9% in the past month.

Xilinx designs and develops programmable devices and associated technologies worldwide. The growing demand for Xilinx’s 16-nanometer UltraScale+ family and Zynq platform will likely remain the major growth driver. Moreover, a ramp-up in 5G rollout across multiple regions remains a catalyst.

Strong momentum for the Vitis software development platform should act as a tailwind for Xilinx. Additionally, the Solarflare acquisition will bring in incremental revenues in the subsequent quarters.

Zacks Rank #1 XLNX has an expected earnings growth rate of 33.1% for the current year (ending March 2022). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past seven days. The stock price of Xilinx has appreciated 13.6% in the past month.