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Should You Buy the Dip in Chip ETFs Ahead of Q1 Earnings?

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The semiconductor corner of the broad technology market was badly hit last week amid a spate of negative news from industry players like chipmaker Taiwan Semiconductor Manufacturing TSM and semiconductor-equipment supplier Lam Research LRCX.

Taiwan Semiconductor reduced its target for sales growth in the global semiconductor industry this year to 5% from its prior outlook of 5-7% growth while Lam Research offered a disappointing outlook for chip-gear shipments for the rest of the year. Notably, the Philadelphia Semiconductor Index dropped 4.3% on Apr 19, marking the biggest one-day drop for the index since Feb 8. In the past week, the index was down 4.4%.

Additionally, the analyst at Bank of America Merrill Lynch dampened the mood by cutting the price target on chipmakers with heavy exposure to Apple's (AAPL - Free Report) iPhone business, including Broadcom (AVGO - Free Report) , Cirrus Logic (CRUS - Free Report) and Skyworks Solutions (SWKS - Free Report) . The analyst expects chip stocks to go 4-7% lower (read: Should You Snap Up Downtrodden Semiconductor ETFs Now?).

As a result, iShares PHLX Semiconductor ETF (SOXX - Free Report) , VanEck Vectors Semiconductor ETF (SMH - Free Report) and PowerShares Dynamic Semiconductors Fund (PSI - Free Report) shed more than 4% each last week and clearly underperformed the broad technology fund (XLK - Free Report) by a wide margin. XLK lost just 0.2% in the same time frame. The weak trend might continue this earnings season given the lack of positive Earnings ESP but a series of positive estimate revision could provide some upside.

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.

Most of the chipmakers like Texas Instruments (TXN - Free Report) , Qualcomm (QCOM - Free Report) , Intel (INTC - Free Report) and Applied Materials AMAT are less likely to surprise this quarter while NVIDIA (NVDA - Free Report) is poised to beat estimates. Let’s delve into the earnings picture of those that have a higher allocation to the above-mentioned ETFs and the power to move the funds up or down as Q1 earnings unfold. SOXX is largely concentrated on the five firms, with a combined share of 35.5%, followed by 27.8% for SMH and 24.5% for PSI.

Inside Our Earnings Prediction

Texas Instruments is set to report on Apr 24, after market close. It has a Zacks Rank #2 and an Earnings ESP of -1.39%, indicating lesser chances of beating estimates this quarter. The earnings estimate for the yet-to-be-reported quarter has gone up by couple of cents in the past 90 days. The earnings surprise track over the past four quarters is also good, with an average beat of 7.04%. The stock has a VGM Score of B (see: all the Technology ETFs here).

Qualcomm has a Zacks Rank #3 and an Earnings ESP of -3.12%, indicating a lower chance of beating estimates this quarter. The Zacks Consensus Estimate for first-quarter 2018 has been revised downward by 18 cents over the past three months. However, the stock delivered a positive surprise of 8.54% in the last four quarters. It has a VGM Score of C. The company is expected to report results after the closing bell on Apr 25.

Intel is slated to release earnings after market close on Apr 26. It has a Zacks Rank #3 and an Earnings ESP of -1.21%, implying a beat cannot be predicted this quarter. The stock has seen a negative earnings estimate revision of couple of cents over the past 90 days for the to-be-reported quarter but delivered a positive earnings surprise of 14.81% on average over the last four quarters. It has a VGM Score of A.

NVIDIA, expected to report on May 8, has a Zacks Rank #3 and an Earnings ESP of +0.65%, indicating reasonable chances of beating estimates this quarter. The company delivered positive earnings surprises in the last four quarters, with an average beat of 40.76% and saw a whopping earnings estimate revision of 66 cents over the past three months for the to-be-reported quarter. The stock has a VGM Score of C (read: 6 Solid Reasons Why You Should Buy Semiconductor ETFs).

Applied Materials has a Zacks Rank #3 and an Earnings ESP of 0.00%, making surprise prediction difficult. Its earnings surprise track over the past four quarters is good, with an average beat of 4.76%. Additionally, the stock witnessed a solid earnings estimate revision of 13 cents over the past 90 days for the to-be-reported quarter. The company has a VGM Score of A and is slated to report on May 17.

Conclusion

Although most of the companies in the space are less likely to beat on earnings, they witnessed positive estimate revisions and have a favorable Zacks Rank. This indicates some good tidings for the broad industry and semiconductor ETFs. Further, SOXX and PSI have a Zacks ETF Rank #1 while SMH has a Zacks ETF Rank #2, suggesting that investors could stuff these funds ahead of earnings season for outperformance.

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