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5 Top Picks to Tap Momentum in Semiconductor Space
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The semiconductor industry had a rough 2018, with most of the major chipset manufacturing stocks closing in the red. The Philadelphia Semiconductor Index (SOX) was down 2.6%. The disappointing performance can be attributed to a prolonged trade conflict and fear of global demand slowdown, chipset supply glut and crash of cryptocurrency.
However, the semiconductor industry has rebounded impressively in 2019. The Philadelphia Semiconductor Index (SOX) is up 25.8% year to date compared with 14.9% growth of the benchmark S&P 500 Index.
Meanwhile, the VanEck Vectors Semiconductor ETF (SMH) –- the fund that closely tracks companies in the industry –- has advanced 27% this year. Moreover, the tech-heavy Nasdaq Composite index has witnessed a jump of 18.9% in 2019.
Disappointing 2018 for Semiconductor Industry
Chipset industry’s downturn in 2018 was the effect of several negative factors. First, is the trade-related conflict between the United States and China, which commenced in March 2018 and aggravated throughout the year.
Secondly, the fear of global economic slowdown, especially the downturn of the Chinese economy, was a major concern. The IMF has reduced global economic growth forecast for 2019 due to trade war concerns.
Finally, the crash of the cryptocurrency industry in 2018 took a heavy toll on the semiconductor industry. Several chipset manufacturers, especially those which manufacture flash memory were optimistic about the growth potential of cryptocurrency. Consequently, chipset supply glut occurred, resulting in price reduction.
Semiconductor Industry Rebounds in 2019
The semiconductor industry has recovered so far this year buoyed by several positive developments.
Firstly, despite a tepid stock market performance in 2018, all was not bad for the semiconductor industry. On Feb 6, the Semiconductor Industry Association announced that in 2018, more than a trillion chips were shipped globally, for the first time in industry’s history. Sales of chips grew 13.7% year over year to $468.8 billion worldwide in 2018.
Secondly, since the beginning of 2019, both United States and China are negotiating earnestly to find out an amicable solution to the trade spat. After a successful round of negotiation in Beijing between high-level delegations of two sides, the second round of talks was completed in Washington this week. A permanent solution seems possible within a month or two.
Thirdly, a dovish monetary stance adopted by the Fed bodes well for the semiconductor manufacturers as this industry is debt prone. Notably, the central bank raised interest rates four times last year, with a hike of 25 basis points each time.
Semiconductor Industry to Largely Benefit From Likely Trade Truce
A trade spat with the United States resulted in significant slowdown of the Chinese economy. However, a strong Chinese economy will give U.S. chipset makers a solid boost as China is the largest market for high-tech products. Meanwhile, China plays the role of a low-cost supplier of intermediary products and other inputs to U.S. chipset industry.
An amicable solution to the U.S.–-China trade war is likely to restore Chinese and global economic growth, which in turn will create demand for high-tech U.S. products. Likewise, repeal of tariffs on Chinese intermediary goods will raise the profit margin of U.S. chipset giants. Moreover, clinching a lasting agreement with China, which will strictly protect U.S. intellectual properties, will be immensely beneficial for U.S. semiconductor behemoths.
Our Top Picks
The major gainers of a possible trade deal will be semiconductor companies. We have narrowed our search to five such stocks that have moved higher in the first quarter and still have upside if a trade deal materializes. All five stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Xilinx Inc. designs and develops programmable devices and associated technologies worldwide. The stock has surged 50% year to date. The company has an expected earnings growth rate of 23.7% for the current year. The Zacks Consensus Estimate for the current year has improved 0.3% over the last 60 days.
KLA-Tencor Corp. (KLAC - Free Report) designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nano-electronics industries worldwide. The stock has surged 38.6% year to date. The company has an expected earnings growth rate of 5.4% for the current year. The Zacks Consensus Estimate for the current year has improved 1.1% over the last 60 days.
Cabot Microelectronics Corp. develops, manufactures and sells polishing slurries and pads used in the making of advanced integrated circuit devices in the semiconductor industry in chemical mechanical planarization process. The stock has surged 25% year to date. The company has an expected earnings growth rate of 35.4% for the current year. The Zacks Consensus Estimate for the current year has improved 6.8% over the last 60 days.
Akoustis Technologies Inc. (AKTS - Free Report) is a semiconductor designer and manufacturer of radio frequency resonators and filters which facilitate signal acquisition and accelerate band performance between the antenna and the back end of mobile devices. The stock has surged 22.9% year to date. The company has an expected earnings growth rate of 26.2% for the current year. The Zacks Consensus Estimate for the current year has improved 9.6% over the last 60 days.
Intel Corp. (INTC - Free Report) is one of the world's largest semiconductor makers in the fields of computing, networking, data storage and communication solutions worldwide. The stock has surged 19.2% year to date. The company has an expected earnings growth rate of 4.9% for the next year. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 60 days.
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.
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5 Top Picks to Tap Momentum in Semiconductor Space
The semiconductor industry had a rough 2018, with most of the major chipset manufacturing stocks closing in the red. The Philadelphia Semiconductor Index (SOX) was down 2.6%. The disappointing performance can be attributed to a prolonged trade conflict and fear of global demand slowdown, chipset supply glut and crash of cryptocurrency.
However, the semiconductor industry has rebounded impressively in 2019. The Philadelphia Semiconductor Index (SOX) is up 25.8% year to date compared with 14.9% growth of the benchmark S&P 500 Index.
Meanwhile, the VanEck Vectors Semiconductor ETF (SMH) –- the fund that closely tracks companies in the industry –- has advanced 27% this year. Moreover, the tech-heavy Nasdaq Composite index has witnessed a jump of 18.9% in 2019.
Disappointing 2018 for Semiconductor Industry
Chipset industry’s downturn in 2018 was the effect of several negative factors. First, is the trade-related conflict between the United States and China, which commenced in March 2018 and aggravated throughout the year.
Secondly, the fear of global economic slowdown, especially the downturn of the Chinese economy, was a major concern. The IMF has reduced global economic growth forecast for 2019 due to trade war concerns.
Finally, the crash of the cryptocurrency industry in 2018 took a heavy toll on the semiconductor industry. Several chipset manufacturers, especially those which manufacture flash memory were optimistic about the growth potential of cryptocurrency. Consequently, chipset supply glut occurred, resulting in price reduction.
Semiconductor Industry Rebounds in 2019
The semiconductor industry has recovered so far this year buoyed by several positive developments.
Firstly, despite a tepid stock market performance in 2018, all was not bad for the semiconductor industry. On Feb 6, the Semiconductor Industry Association announced that in 2018, more than a trillion chips were shipped globally, for the first time in industry’s history. Sales of chips grew 13.7% year over year to $468.8 billion worldwide in 2018.
Secondly, since the beginning of 2019, both United States and China are negotiating earnestly to find out an amicable solution to the trade spat. After a successful round of negotiation in Beijing between high-level delegations of two sides, the second round of talks was completed in Washington this week. A permanent solution seems possible within a month or two.
Thirdly, a dovish monetary stance adopted by the Fed bodes well for the semiconductor manufacturers as this industry is debt prone. Notably, the central bank raised interest rates four times last year, with a hike of 25 basis points each time.
Semiconductor Industry to Largely Benefit From Likely Trade Truce
A trade spat with the United States resulted in significant slowdown of the Chinese economy. However, a strong Chinese economy will give U.S. chipset makers a solid boost as China is the largest market for high-tech products. Meanwhile, China plays the role of a low-cost supplier of intermediary products and other inputs to U.S. chipset industry.
An amicable solution to the U.S.–-China trade war is likely to restore Chinese and global economic growth, which in turn will create demand for high-tech U.S. products. Likewise, repeal of tariffs on Chinese intermediary goods will raise the profit margin of U.S. chipset giants. Moreover, clinching a lasting agreement with China, which will strictly protect U.S. intellectual properties, will be immensely beneficial for U.S. semiconductor behemoths.
Our Top Picks
The major gainers of a possible trade deal will be semiconductor companies. We have narrowed our search to five such stocks that have moved higher in the first quarter and still have upside if a trade deal materializes. All five stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Xilinx Inc. designs and develops programmable devices and associated technologies worldwide. The stock has surged 50% year to date. The company has an expected earnings growth rate of 23.7% for the current year. The Zacks Consensus Estimate for the current year has improved 0.3% over the last 60 days.
KLA-Tencor Corp. (KLAC - Free Report) designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nano-electronics industries worldwide. The stock has surged 38.6% year to date. The company has an expected earnings growth rate of 5.4% for the current year. The Zacks Consensus Estimate for the current year has improved 1.1% over the last 60 days.
Cabot Microelectronics Corp. develops, manufactures and sells polishing slurries and pads used in the making of advanced integrated circuit devices in the semiconductor industry in chemical mechanical planarization process. The stock has surged 25% year to date. The company has an expected earnings growth rate of 35.4% for the current year. The Zacks Consensus Estimate for the current year has improved 6.8% over the last 60 days.
Akoustis Technologies Inc. (AKTS - Free Report) is a semiconductor designer and manufacturer of radio frequency resonators and filters which facilitate signal acquisition and accelerate band performance between the antenna and the back end of mobile devices. The stock has surged 22.9% year to date. The company has an expected earnings growth rate of 26.2% for the current year. The Zacks Consensus Estimate for the current year has improved 9.6% over the last 60 days.
Intel Corp. (INTC - Free Report) is one of the world's largest semiconductor makers in the fields of computing, networking, data storage and communication solutions worldwide. The stock has surged 19.2% year to date. The company has an expected earnings growth rate of 4.9% for the next year. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 60 days.
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.
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