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Dip in Semiconductor Stocks Temporary: 4 Picks

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On Oct 4, chip stocks took a beating after Deutsche Bank (DB - Free Report) reduced its 2019 earnings estimates for a number of chipmakers, citing growing weakness in business activity. This raised panic among investors, leading to huge selloffs on Thursday.

That said, chip stocks have been largely responsible for the long-running market rally. However, fears of a bubble are making a comeback courtesy of a bunch of market watchers, who feel that the trade war has started taking a toll on chip stocks.

However, the sector’s fundamentals are still strong, with global semiconductor sales increasing once again in August, per the Semiconductor Industry Association (SIA).  Given this scenario, it makes semiconductor stocks must haves for your portfolio.

Semiconductor Sales Take a Hit

On Oct 4, investors’ confidence was dented after Deutsche Bank reduced its 2019 earnings estimates by 5% on average for as many as eight chipmakers. The firm cited weakness in business activity as a major reason that could affect the semiconductor industry.

This resulted in investors panicking, leading to huge selloffs. This saw shares of Texas Instruments Incorporated (TXN - Free Report) , Maxim Integrated Products, Inc. (MXIM - Free Report) and Analog Devices, Inc. (ADI - Free Report) plummeting 2.1%, 2.3% and 2%, respectively.  

The PHLX Semiconductor index (SOX) declined more than 1.8%. Understandably, trade war fears have been making investors jittery. China is one of the biggest markets for semiconductors and investors are panicking that a full-fledged trade war could hit the chip stocks.

Global Semiconductor Sales Rise

Semiconductor stocks may have been taking a hit of late but chip stocks have been responsible for the market’s rally for quite some time now. Trade war fears have been gripping markets, making investors jittery. Despite this, the Semiconductor Industry Association on Oct 1 said that global semiconductor sales reached $40.16 billion in August, up 14.9% year over year. Moreover, global semiconductor sales were 1.7% higher than July’s total of $39.49 billion. 

This is also the first time that monthly global chip sales have topped the $40 billion mark. According to John Neuffer, president and CEO, Semiconductor Industry Association, “Sales remain strong across every major semiconductor product category and regional market, with the China and Americas markets standing out with the largest year-year growth.”

Also, regional sales compared to August 2017 increased in China to 27.3%. Moreover, per research firm, Inkwood Research, the global semiconductor market is projected to witness a CAGR of 7.67% between 2017 and 2024. 

China is one of the biggest markets for semiconductors and trade war fears have been denting investors’ confidence. However, the impressive sales figures are a proof that the fears might just be overblown. Also, China’s limitations in building its own tech industry might restrict it from acting against U.S.-based chipmakers.

Our Choices

The United States is the largest semiconductor manufacturing country, while China is its biggest market. Trade war fears definitely have dented investors’ confidence but chip stocks aren’t as susceptible to trade war as industrials. Also, China’s limitations in building its own tech industry might restrict it from acting against U.S.-based tech players.

Given the robust demand for semiconductors and an increase in global semiconductor sales once again in August, the recent fears may be overblown. This is why picking semiconductor stocks still looks like a smart option. However, picking winning stocks may be difficult. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Vishay Intertechnology, Inc. (VSH - Free Report) is one of the world's largest manufacturers of discrete semiconductors (diodes, MOSFETs, and infrared optoelectronics) and passive electronic components (resistors, inductors and capacitors). 

Vishay Intertechnology sports a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 39.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.5% over the last 60 days.

Photronics, Inc. (PLAB - Free Report) is a leading worldwide manufacturer of photomasks. Photomasks are high precision quartz plates that contain microscopic images of electronic circuits. 

The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved by 9.3% over the last 60 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Xilinx, Inc. (XLNX - Free Report) a leading provider of All Programmable FPGAs, SoCs, MPSoCs and 3D ICs has introduced the architecture for a new Extensible Processing Platform that will deliver unrivaled levels of system performance, flexibility and integration to developers of a wide variety of embedded systems. 

Xilinx carries a Zacks Rank #2 (Buy). The company has expected earnings growth of 6.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 60 days.

ASML Holding N.V. (ASML - Free Report) is a world leader in the manufacture of advanced technology systems for the semiconductor industry.

ASML Holding N.V. has a Zacks Rank #2. The company has expected earnings growth of 25.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 60 days.

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