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Will Chip ETFs Continue Their Hot Streak as Q4 Unfolds?

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The semiconductor corner of the broad technology market continued its last year’s winning streak at the start of 2018. Robust demand for memory chips and other semiconductor products, owing to the rapid adoption of cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, and other advanced information technologies, is fueling huge growth in the space (read: Two Blockchain ETFs Go Live for The First Time).

In particular, iShares PHLX Semiconductor ETF (SOXX - Free Report) , VanEck Vectors Semiconductor ETF (SMH - Free Report) and PowerShares Dynamic Semiconductors Fund (PSI - Free Report) have been hitting multiple highs this year and are again leading the tech surge. These funds have been up 11.1%, 10.9% and 10.4%, respectively, so far, and have crushed the broad technology fund (XLK - Free Report) by a wide margin. XLK has gained 7.5% in the same time frame.

A combination of other factors like a stabilizing PC market, waves of consolidation and expectation of solid corporate earnings are propelling semiconductor stocks higher. Texas Instruments (TXN - Free Report) reported its quarterly results after the market close on Jan 23, where it met the Zacks Consensus Estimate for earnings and surpassed the revenue estimate. Shares of TXN were down about 7% in after-hours trading (read: Texas Instruments Dips As Tax Charge Digs Into Q4 Earnings).

However, most of the other chipmakers like Intel (INTC - Free Report) , NVIDIA (NVDA - Free Report) and Applied Materials (AMAT - Free Report) are poised to surprise this quarter. Let’s delve into the earnings picture of those that have a higher allocation to these ETFs and the power to move the funds up or down as Q4 earnings unfold. SOXX has the largest concentration in the four firms with a combined share of 29.1%, followed by 26% for SMH and 21% for PSI.

According to the our methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases our chances of predicting an earnings beat, while a Zacks Rank #4 or 5 (Sell rated) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

What’s in Store?

Intel is slated to release earnings after market close on Jan 25. It has a Zacks Rank #3 and an Earnings ESP of -0.17%, indicating lower chances of beating estimates this quarter. The stock has seen a negative earnings estimate revision of three cents over the past 90 days for the to-be-reported quarter but delivered a positive earnings surprise of 9.72% on average over the last four quarters. It has a VGM Style Score of B (read: 5 ETF Ways to Tap Hot Semiconductor Stocks).

NVIDIA, expected to report on Feb 8, has a Zacks Rank #2 and an Earnings ESP of +1.93%, indicating higher chances of beating estimates this quarter. The company delivered positive earnings surprises in the last four quarters, with an average beat of 33.51% and saw positive earnings estimate revision of 19 cents over the past three months for the to-be-reported quarter. The stock has a VGM Style Score of C.

Applied Materials has a Zacks Rank #2 and an Earnings ESP of +0.57%. Its earnings surprise track over the past four quarters is good, with an average beat of 2.82%. Additionally, the stock witnessed a solid earnings estimate revision of six cents over the past 90 days for the to-be-reported quarter. The stock has a VGM Style Score of C. The company will report on Feb 21.


Given the fact that most of the companies in the space are poised to beat earnings estimates and saw positive estimate revisions, semiconductor ETFs will see prolonged bullishness. Further, SOXX, SMH and PSI have a Zacks ETF Rank #1, suggesting that their outperformance will continue (see: all the Technology ETFs here).

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