Chipmakers Offer Investment Potential

April 23, 2018

Chipmakers offer investment potential after market correction and resurgence

Chipmakers have experienced a market correction and some market analysts are tipping the sector as a strong buy with good investment potential.

Boris Schlossberg, managing director of FX strategy at BK Asset Management, told CNBC: “They got hit because of China concerns, obviously, and also because bitcoin has kind of fallen off the radar, but I think when you look at the fundamentals, the business is supposed to increase by 8 percent this year which is a very healthy rise.”

Semiconductor Industry

The semiconductor industry in the US is predicted to record 11% sales growth this year after already seeing a 17 percent increase in 2017, according to FactSet research data, while earnings are also expected to grow by 23.5 percent.

The SMH VanEck Vectors Semiconductor ETF, which is an index made up of the 25 biggest U.S chipmakers, saw a drop in its value over March, which hit $103.42 a share. This put the index at approximately 3 percent above Schlossberg’s buy target.

Bearish View

However, Chad Morganlander, who is the portfolio manager at advisory firm Washington Crossing Advisors, is more cautious about investing in the sector.

Let me be very clear here. They do have an exciting future, the exchange-traded fund, and as well, semiconductors. Unfortunately, it’s fully reflected in the valuation of this group.

SMH is currently trading at 23 times trailing earnings, marginally below the Nasdaq’s 23.6 times multiple. Individual companies such as Nvidia and Texas Instruments are trading at higher multiples.

The SMH’s valuations scored in February and early March are resurgent after hitting a year-to-date low on Feb. 8. “We will be fading this trade in the short run but also in the intermediate run, we would actually be avoiding this group.

The SMH sits just on the brink of correction territory, after falling 9.7 percent from a 52-week high set on March 13. A fall of over 10 percent is commonly accepted as an indication of a correction.