Semiconductors Bounce Back: 3 Stock Picks

Despite hiccups in the recent past, semiconductor stocks remain a favorite among investors. Stocks from this sector have advanced appreciably this year. At the same time, the Semiconductor Industry Association (:SIA) has projected significant growth for the sector in the years ahead.

Temporary Correction

Recently, some market watchers were of the opinion that the semiconductor sector was headed for a correction. Microchip Technology Inc. (MCHP) CEO Steve Sanghi issued a warning after the trading session ended on Oct 9. Sanghi said: “Another industry correction has begun.” Chip stocks suffered average losses of around 7% the next day.

Since then, they have staged an impressive recovery. One of the key developments that aided such a recovery was the recent U.S.-China agreement. The two countries agreed to eliminate tariffs on high tech products across 54 members of the Information Technology Agreement.

According to U.S. estimates, these products could be worth around $1 trillion. SIA CEO Brian Toohey hailed the agreement as a “victory for the U.S. semiconductor industry.” After all, over 80% of U.S. semiconductors are sold abroad.

Significant Gains

Ultimately, the PHLX Semiconductor Sector index, better known as the SOX jumped 27% over the year. This is more than twice as much as the S&P 500. This increase is a result of gains made by some of its heavy-weight constituents. Micron Technology, Inc. (MU) is among the largest gainers this year, increasing 63.9% year-to-date. The company has a weight of 8.1 on the SOX.

Similarly, Applied Materials, Inc. (AMAT) has gained 35.1%, and carries a weight of 6.3. Only some stocks, like QUALCOMM Inc. (QCOM) registered losses, and even so it has slipped only marginally, by 2.1%. Intel Corp. (INTC) and Texas Instruments Inc. (TXN), which carry weights of 8.1 and 8.6, have gained 44.7% and 23.8% respectively.

Impressive Global Outlook

The SIA has said that worldwide sales of semiconductors have increased 9.6% year-over-year to $29.7 billion for Oct 2014. This is also 1.5% higher than last month’s sales of $29.2 billion. Additionally, sales across the Americas lead all regions after registering a 12.2% increase compared to the same period last year. These figures are compiled by the World Semiconductor Trade Statistics (:WSTS) organization.

Also, the SAI has validated the WSTS Autumn 2014 global semiconductor sales forecast. According to these projections, worldwide industry sales are expected to increase 9% to $333.2 billion in 2014, compared to total sales in 2013. Additionally, the WSTS projects global growth of 3.4% for 2015 and 3.1% for 2016.

Our Choices

Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.

Intel’s third quarter earnings exceeded the Zacks Consensus Estimate and forward guidance did not disappoint. Intel’s promise of success in the mobile segment is encouraging. This is likely to be mitigated by conservative spending by individuals and corporations, competition from ARM-based devices, and the impact of new product ramp-up costs.

However, its leading position in PCs, strength in servers, growing position in software and IoT segments and headway in process technology is undeniable.

Intel holds a Zacks Rank #2 (Buy) and has expected earnings growth of 18.8%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.74.

Texas Instruments’ third-quarter earnings were above the Zacks Consensus Estimate and forward guidance was very strong. Demand appears to be picking up, with the higher mix of analog and embedded processing products contributing to profits. The company’s compelling product line, market share gains, strategic refocus on high-growth areas of the analog and embedded processing markets are some its major strengths.

Apart from a Zacks Rank #2 (Buy), the company has expected earnings growth of 41.3%. It has a P/E (F1) of 21.57x.

NVIDIA Corporation’s (NVDA) second quarter bottom line surpassed the Zacks Consensus Estimate. Aided by growth in Tegra Processor, Enterprise GRID, GeForce GPU, and Tesla sales, the year over year comparisons were favorable. Moreover, third quarter revenue guidance was encouraging. The company also gained significant traction in the Tegra segment due to its Tegra 4 and Tegra K1 shipments.

Moreover, NVIDIA’s innovative product pipeline that consists of the recently introduced SHIELD 2 and mobile processor, Tegra K1, will boost top-line growth, going forward.

NVIDIA holds a Zacks Rank #2 (Buy) and has expected earnings growth of 34.3%. It has a P/E (F1) of 19.43x.

The outlook for semiconductors looks bright following recent developments. These stocks are poised to move higher during what is usually a good period for stocks. Given these factors, adding these stocks to your portfolio would be a prudent choice.

Read the Full Research Report on INTC
Read the Full Research Report on TXN
Read the Full Research Report on MU
Read the Full Research Report on NVDA
Read the Full Research Report on MCHP
Read the Full Research Report on AMAT
Read the Full Research Report on QCOM


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