Buy chip stocks on weakness?

January 23, 2018 04:30 PM

Semiconductor stocks are being sold. What should a trader do? First off, realize the earnings growth is there. That is keeping the fire lit on the bullish outlook for these types of large-cap stocks over a longer annual time frame.

The broad catalysts for another run in the semiconductor space are indeed in place. The Zacks Industry Rank for the eight General Semiconductor stocks is rated at #4 out of 265 as of mid-December. There are also two new positive analyst earnings estimate revisions showing up in our system, and no negative revisions. 

The General Semiconductor stocks industry ranking has not dropped lower than #11 over the past eight weeks. That is a hot industry.

With that being said, a trader must ask, why the selling — and likely the hedge fund shorting — now on a prepackaged daily trading schedule?  Look into the leading stock’s valuation metrics. They are mostly terrible. The exception right now, in terms of where value might be found, is in the granddaddy of semi chip stocks— Intel Corp. 

There is more room to the downside in this industry, so finding a compelling share price bottom won’t be easy. Those that make money, owning stocks like this, are going to have to buck the crowd and buy. But wait for now.

Of the three top-rated stocks in the General Semiconductor sector by Zacks, only one presents a buying opportunity: 

Intel Corporation (INTC): The forward P/E valuation ratio is a low 13.75, giving the stock a nice long-term Zacks Value-Growth-Momentum (VGM) score of B. The PEG ratio (P/E ratio divided by the growth rate) is 1.63, which is below 2.0, where the valuation issues usually lie.

NVIDIA Corporation (NVDA): The forward P/E valuation ratio is a nosebleed 47.92, giving the stock a terrible long-term Zacks VGM score of F. The PEG ratio is 4.28, well above 2.0.

STMicroelectronics (STM): The forward P/E valuation ratio is 24.13, a bit above the S&P500’s 18.3. This gives the stock a terrible long-term Zacks VGM score of F. The PEG ratio is 4.83.  

About the Author

John Blank, Zacks Investment Research