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Tech Gains Despite Fed's Bond-Buy Tapering Signal: 5 Picks

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The July FOMC meeting minutes of the Fed revealed that an increasing number of its officials have advocated tapering of the central bank's existing $120 billion per month bond-buy program as early as October. Since March 2020, the Fed is buying $80 billion of Treasury Notes and $40 billion mortgage-backed bonds per month in order to keep sufficient liquidity in the economy amid the cornavirus-led devastations.

A systematic termination of bond buying will raise the yield of long-term government bonds, especially the 10-Year U.S. Treasury Note. Higher risk-free returns adversely impact the net present value of an investment in growth stocks like technology due to a higher discount rate. Furthermore, a hike in benchmark interest rate would affect growth stocks as these companies generally depend on easy access to cheap credit for their business expansion.

However, last week, of the 11 broad sectors of the market's benchmark S&P 500 Index, the technology sector ended in positive territory. The other sectors that gained last week are all defensive. Each and every cyclical or reopening sector ended in red.

One reason Why the growth-oriented technology sector stood out last week is investors' concern about the rapidly spreading highly-infectious Delta variant of coronavirus. At this stage, it will be prudent to invest in tech stocks, especially the semiconductor stocks that are thriving on the back of a massive shortage of microchips. The Philadelphia Semiconductor Index (SOX) surged 9% in the past three months.

Shortage of Microchips

The semiconductor industry continues to thrive amid a global supply crisis that has kept several other sectors under pressure. According to the Semiconductor Industry Association, global semiconductor sales came in at $133.6 billion in the second quarter, reflecting an increase of 29.2% year over year and a jump of 8.3% from the first quarter of 2021.

Regionally, sales increased year over year in all major markets. Sales in Europe grew 43.2%, while in Asia-Pacific and China it jumped 34% and 28.3%, respectively. These were followed by a rise of 22.9% in the Americas and 21.2% in Japan.

Semiconductors are now at the heart of many electronic devices that we use regularly, be it PCs, laptops, smartphones, and the like. The automotive industry is also a major user of semiconductors as chips are an important component of vehicles.

When the coronavirus broke out last year, people were compelled to stay at home and work remotely. This led to a surge in demand for devices like laptops and PCs. Demand for gaming also skyrocketed as people turned to at-home forms of entertainment and bought gaming consoles as well as gaming hardware for their PCs.

This, in turn, shifted the supply of semiconductors to consumer electronics as automotive factories were shut when COVID-19 intensified. But when the restrictions began to gradually ease, demand for vehicles made a solid comeback as people preferred to buy their vehicles and not travel via public transport to avoid coming in contact with the virus.

Consequently, auto manufacturers are facing a shortage of chips. Other industries like consumer electronics began to face the crisis too as demand for such items remained high.

Budgetary Support

On Jun 8, the U.S. Senate passed one of the largest bipartisan bill of committing around $250 billion in funding or scientific research, subsidies for chipmakers and robot makers, and an overhaul of the National Science Foundation.

The bill provides a package of $52 billion to boost semiconductor chip production and R&D activities over five years. On Jun 29, The House of Representative approved its version of a legislative package to boost U.S. scientific competitiveness to keep pace with China. President Joe Biden also expressed his intention to provide $50 billion in budgetary support to accelerate semiconductor production and research.

Lawmakers are concerned that the United States had a 37% share of the global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12% as of now. Additionally, the Asian giant China is aggressively spending more than $150 billion to boost semiconductor manufacturing and unsettle the United States from its global leadership in this key technology. These show the urgency of the U.S. Congress to strengthen its hi-tech semiconductor industry.

Our Top Picks

We have narrowed down our search to five semiconductor bigwigs with strong growth potential for 2021 and a solid long-term (3-5 years) growth rate. These stocks witnessed solid earnings estimate revisions within the last 30 days, reflecting a robust business potential for the rest of 2021. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks in the past month.

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Zacks Investment Research


Image Source: Zacks Investment Research

Texas Instruments Inc. TXN has an expected earnings growth rate of 31.7% for the current year. The company has a long-term growth rate of 9.3%. The Zacks Consensus Estimate for current-year earnings improved 3% over the last 30 days.

The continued rebound in the automotive market is a tailwind for the company. Solid growth in the industrial market is another positive. Strategic investments in new growth avenues and competitive advantages should also reap results in the long term. Its portfolio of long-lived products and efficient manufacturing strategies are the other tailwinds.

Qualcomm Inc. QCOM is well-positioned to benefit from solid 5G traction with greater visibility to meet its long-term revenue targets. For calendar-year 2021, 5G handsets are expected to witness 150% year-over-year growth at the midpoint to about 450-550 units.

Qualcomm has raised the bar for driverless cars with the launch of the first-of-its-kind automotive platform — Snapdragon Ride — which enables automakers to transform their vehicles into self-driving cars using AI.

The company has an expected earnings growth rate of 10.6% for next year (ending September 2022). It has a long-term growth rate of 21%. The Zacks Consensus Estimate for next-year earnings improved 6.4% over the last 30 days.

Advanced Micro Devices Inc. AMD is riding on robust performance from the Computing and Graphics, and Enterprise Embedded and Semi-Custom segments. It is benefiting from strong sales of its Ryzen and EPYC server processors, owing to the increasing proliferation of AI and Machine Learning in industries like cloud gaming and the supercomputing domain.

Moreover, the growing clout of 7-nanometer products in the data center vertical, driven by work-from-home and online learning trends, is a key catalyst. Management raised its 2021 guidance for revenues and gross margin on the back of strong growth across all businesses.

The company has an expected earnings growth rate of 93.8% for the current year. It has a long-term growth rate of 44.6%. The Zacks Consensus Estimate for current-year earnings improved 15.2% over the last 30 days.

Analog Devices Inc. ADI is benefiting from strengthening momentum across the electric vehicle space on the back of its robust Battery Management System solutions. Growing power design wins are the other major positives.

Additionally, rising adoption of advanced radio systems in 5G infrastructure is driving growth in the company’s communication business. Solid momentum of the HEV platform across cabin electronics ecosystem remains a tailwind too. Analog Devices remains optimistic about growth opportunities related to 5G.

The company has an expected earnings growth rate of 31% for the current year (October 2021). It has a long-term growth rate of 12.3%. The Zacks Consensus Estimate for current-year earnings improved 2.4% over the last 7 days.

Microchip Technology Inc. MCHP is riding on consistent strength in its analog and microcontroller businesses. It benefited from the dominance of its 8, 16 and 32-bit microcontrollers. Strategic acquisitions like Microsemi and Atmel have expanded Microchip Technology’s product portfolio, which augurs well for the long haul.

The company is gaining from a recovery in demand across industrial, automotive and consumer end-markets, on the reopening of economies and easing shelter-in-place guidelines, globally. It continues to develop and introduce a wide range of innovative and proprietary new linear, mixed-signal, power, interface, and timing products to fuel the future growth of the analog business.

Microchip Technology has an expected earnings growth rate of 28.4% for the current year (March 2022). It has a long-term growth rate of 16.9%. The Zacks Consensus Estimate for current-year earnings improved 7.12.4% over the last 30 days.


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