Semiconductor stocks were hit hard by the recent market sell-off, but the underlying business of this industry is growing—and should continue that trend in 2018 and beyond. Throughout the chip-making space, companies have successfully adapted to the changing needs of the consumer, including an increased demand for small, high-powered chips that enable “Internet of Things” (IoT) devices.
For those that don’t know, the Internet of Things is the growing world of interconnected household and industrial devices. Everyday products and machines can now be embedded with sensor technology to process data or interact with other electronic devices.
For example, consumer-level IoT products include things like Amazon’s (AMZN - Free Report) Echo “smart speaker,” wearable motion and activity tracking products, and advanced in-car technology. On the commercial side of the IoT market, industrial manufacturers have begun implementing sensors into machines to track performance and efficiency.
(Also Read: How to Invest in the "Internet of Things")
As demand for the microchips that power these IoT devices continues to grow, semiconductor manufacturers with a focus on IoT products will continue to benefit. And 2018 promises to be another marquee year for these suppliers, with the number of connected devices worldwide set to continue its rapid growth.
With that said, we’ve found three already-strong stocks that are looking to benefit even more from further IoT growth in 2018:
1. Texas Instruments Incorporated (TXN - Free Report)
Although you might recognize the brand because of its calculators, Texas Instruments is actually one of the leading suppliers of advanced semiconductors in the world. The company’s IoT profile falls under its Embedded Processors division, which includes the Connectivity, Microcontrollers, and Processors categories.
Texas Instruments reported year-over-year growth of 20% in its Embedded Processors division during the most recent quarter. The firm also surpassed revenue estimates and released in-line guidance. TXN is now sporting a Zacks Rank #2 (Buy). Meanwhile, the stock has a Forward P/E of 20.5 and a PEG of 2.1, so investors are getting a decent price for its earnings and earnings growth outlook.
2. Microchip Technology Incorporated (MCHP - Free Report)
Microchip Technology is a manufacturer of microcontroller, memory, and analog chips. The company is a leader in several IoT-related fields, including automotive and wireless connectivity. Microchip also develops products that are secure and trusted by platforms like Alphabet’s (GOOGL) Google Cloud.
MCHP is currently sporting a Zacks Rank #2 (Growth). The company is an aggressive EPS growth pick, with current estimates calling for earnings to improve by 36% this fiscal year. Shares are also trading at an attractive 15.1 forward 12-month earnings, and its PEG of 1.1 implies its growth is being undervalued. Management is also generating cash flow growth of 57%, which should help it improve its financial position to fund further innovation.
3. Comtech Telecommunications Corp. (CMTL - Free Report)
Comtech develops innovative products, systems, and services for advanced communications solutions. The company markets its solutions to both commercial and government clients, and it conducts business through three key segments: telecommunications transmission, RF microwave amplifiers, and mobile data communications.
CMTL is holding a Zacks Rank #1 (Strong Buy) right now. The stock is a hot momentum pick after gaining a staggering 43% over the past three months. The company will look to continue that momentum with projected earnings growth of 232% this year. Shares are pricey at 27x forward earnings, but Comtech has consistently crushed expectations over the past year—and investors will pay a premium for that.
The Internet of Things is one of the most exciting emerging tech markets in the world. And while these specific products are interesting, the real moneymakers in these situations are the companies that are building the tech that powers these products.
The best way for investors to cash in on this growing trend is to identify companies that are not only investing in the Internet of Things, but are also displaying solid fundamentals and impressive Zacks metrics.
Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
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