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Will Chip ETFs Continue Their Solid Run As Q1 Unfolds?

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Semiconductor stocks are continuing last year’s stellar ride thanks to improving overseas demand and innovative technologies. New areas such as autonomous cars, cloud computing, gaming, wearables, VR headsets, drones, virtual reality devices and Internet of Things (IoT) are fueling growth in the sector, offsetting struggling traditional businesses like PCs and smartphones.

In particular,iShares PHLX Semiconductor ETF (SOXX - Free Report) , Market Vectors Semiconductor ETF (SMH - Free Report) , PowerShares Dynamic Semiconductors Fund (PSI - Free Report) andFirst Trust Nasdaq Semiconductor ETF (FTXL - Free Report) have gained 8.5%, 8.6%, 13.8%, and 8.7%, respectively, in the year-to-date time frame. This trend is likely to continue in the days ahead given that most of the chipmakers are poised to surprise again this quarter. This is especially true as semiconductors are expected to be big contributors to the overall tech sector’s earnings growth of 10.9%, as per the latest Earnings Outlook. Notably, semiconductor earnings are expected to grow 43.5% in Q1 (read: Buy Hot Tech ETFs to Avoid Trump Uncertainties).

In fact, major chipmakers – Lam Research Corporation (LRCX - Free Report) and Qualcomm (QCOM - Free Report) – came up with better-than-expected quarterly results this week. LRCX topped our earnings estimate by 10.24% while QCOM surprised by 14.29%. Taiwan Semiconductor (TSM - Free Report) also outpaced our earnings estimate by a penny. These three firms occupy substantial portions in the above-mentioned ETFs.

Let’s delve into the earnings picture of other major chipmakers like Intel (INTC - Free Report) , Texas Instruments (TXN - Free Report) , and NVIDIA (NVDA - Free Report) that are expected to report results next week. These stocks have higher allocation to the ETFs and have the power to move the funds up or down as Q1 earnings unfold. SMH has the largest concentration in these three firms with a combined share of 21.65%, followed by 23.6% for SOXX, 17.4% for FTXL and 14.6% for PSI.

According to the our surprise prediction methodology, stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP are likely to beat earnings estimates, while those with Zacks Rank #4 or 5 (Sell rated) are best avoided (read: Play Positive Surprise with These Sector ETFs).

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

What’s in Store?

The world’s largest chipmaker, Intel, is slated to release earnings after market close on April 27. It has a Zacks Rank #4 (Sell) and an Earnings ESP of 0.00%. The stock saw a negative earnings estimate revision of four cents over the past 90 days for the to-be-reported quarter but delivered a positive earnings surprise of 9.11% on average over the last four quarters. The stock is a triple play with a Value, Growth and Momentum Style Score of B each.

Texas Instruments has a Zacks Rank #2 and an Earnings ESP of 0.00%, making surprise prediction difficult. It delivered an average positive earnings surprise of 7.09% in the last four quarters. The Zacks Consensus Estimate for first-quarter 2017 moved up by eight cents over the past three months. It represents substantial earnings growth of 27.49% from the year-ago quarter. Further, the stock has a solid Growth Style Score of A each but a dull Value and Momentum Style Scores of D each. The company is expected to report after the closing bell on April 25 (see: all the Technology ETFs here).

NVIDIA is expected to release its earnings report on May 9 after the closing bell. It has a Zacks Rank #3 and an Earnings ESP of -4.55%, indicating lower probability of beating estimates this quarter. The company delivered positive earnings surprises in the last four quarters, with an average beat of 27.41% and saw positive earnings estimate revision of three cents over the past three months for the to-be-reported quarter. Further, the stock has a top Growth Style Score of A, but an unfavorable Value and Momentum Style score of F and D, respectively.


Given that these companies have a track record of earnings beat and a solid Industry Zacks Rank in the top 22%, semiconductor ETFs will likely get a boost in the coming days. Further, SOXX, SMH and PSI have a Zacks ETF Rank of #1, suggesting their potential to outperform.

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