Technology is the best performing sector as we can see also from the NASDAQ come-back as the best responding index in a recent correction. A big part of technology sector outperformance is a semiconductors industry. Microchips are everywhere, from simple electronic devices such as a calculator to advanced systems like air traffic control.
Demand Is Rising
Demand for semiconductors has been rising not only in known traditional markets but also in new areas that are exploding:
- Cloud Computing is being adopted by more and more businesses escaping from traditional software. Look at Salesforce.com – it is the best CRM product in the world.
- An Artificial Intelligence is one of the top R&D investments across plenty of companies.
- Autonomous Cars
- Big Data Analytics
- Internet of Things (IoT)
- High Tech-Gaming such as Virtual Reality
All of them need semiconductors while new areas are constantly coming that will need semiconductors. The market size is expected to expand rapidly in following years. Thus, a long-term investment offers exciting opportunities in the industry.
The industry is pretty cyclical, which poses a risk to investors in case of economic shocks and downturns. The macroeconomic dynamics must be watched as with most of the segments around the economy. For instance, the financial crisis of 2008 or dot.com bubble in 2000 had a very negative effect on the semiconductors. At the moment we are in economic expansion with no signs of economic crisis. Even the recent inflation threats do not mean an arrival of systematic risk that could harm the industry.
How to invest
There are two possibilities for investors:
Semiconductor ETFs – if you don’t have time to analyze individual companies, this is the best option.
Semiconductor Stocks – riskier, however, as learned in the first year at the University, higher risk – higher return.
- VanEck Vectors Semiconductor ETF (SMH)
- iShares PHLX Semiconductor ETF (SOXX)
- Direxion Daily Semiconductor Bull 3x Shares (SOXL)
- PowerShares Dynamic Semiconductor (PSI)
- SPDR S&P Semiconductor ETF (XSD)
Companies engaged in the production of semiconductors are divided into five different segments: Broad Line, Equipment & Materials, Integrated Circuits, Memory Chips and Specialized. Broad Line is probably most diversified so investing in companies within this category shall carry the least risk as in the rest.
A current trend is showing many investing opportunities among all of the segments. For now, I’m going to pick one trendy stock with excellent valuation and profitability profiles from first three respectively.
Intel Corporation (INTC)
Well known company, its profile needn’t be introduced.
The fundamental summary looks pretty good:
- Return on Equity (RoE) = 14.02
- Return on Invested Capital (RoIC) = 10.16
- Debt to Enterprise Value (EV) = 0.11
- The last reported earnings have beaten the estimates by more than 20%.
The technical part is slightly tricky, but it should certainly be considered as bullish setup.
The price has broken its long-term resistance in September last year and surges to form a new trend channel (top blue lines). The recent resistance was just broken, however, the volume does not represent that strong buying power yet. Furthermore, the RSI and MACD are showing a slight divergence. The long-term investors should not worry about this since Intel is showing great results with bright trend overview. The short-term traders should perhaps wait if the price holds at these levels and possibly buy on a pullback. The price is likely to move between recent highs and 100 MA until it consolidates for further increases.
Equipment and Materials
IPG Photonics Corporation (IPGP)
The company designs, produce and distributes various types of lasers used for applications in advanced technologies, telecommunications, and medical applications.
The fundamentals are excellent:
- Return on Equity (RoE) = 19.42
- Return on Invested Capital (RoIC) = 18.98
- Debt to Enterprise Value (EV) = 0.00
- The last reported earnings have beaten the estimates by 3%.
The company’s price if the following trend quite well, there two resistance levels ahead. Both long-term and short-term traders should wait for at least the first resistance is broken. The second one that is the highest high should be carefully watched.
Microsemi Corporation (MSCC)
The company designs and manufactures different types of semiconductor solutions.
The fundamentals are also quite decent:
- Return on Equity (RoE) = 9.47
- Return on Invested Capital (RoIC) = 4.64
- Debt to Enterprise Value (EV) = 0.23
- The last reported earnings have matched the estimates.
Microsemi has broken its resistance trend line (blue dashed line) and reached the recent high. Due to higher volatility, it may be consolidating within the orange rectangle before it takes another surge.
All three companies bring good investing opportunity. It is up to an individual how to correctly time the entry point. From the long perspective, the investors should profit from investing in the semiconductors. The important is to stay disciplined and focus on the big picture!