The market, and most investors and traders, had become bearish regarding semiconductor and chip stocks. You can’t really blame them, though – maybe this affected you as well -as during the COVID-19 pandemic, semiconductor shortages were all the rave, affecting several industries and taking a massive hit on those directly exposed to the sector.
Today, it seems that the supply chain and the manufacturing names are back to normal, so it is only a matter of returning demand until stocks in the VanEck Semiconductor ETF (NASDAQ: SMH) begin to attract many of those investors back into the space. Wall Street could also jump in them soon, particularly after Taiwan Semiconductor Manufacturing (NYSE: TSM) reported an explosive quarter.
That stock is up nearly 20.0% since the announcement, and it has opened up a can of worms for others in the space to start accruing some investor interest. Specifically, names like ASML (NASDAQ: ASML) have their own earnings coming out this week, and markets are betting on a similar rally after a likely beat, but more on that later.
Big(ger) picture at play
When the biggest investment names on Wall Street talk, investors rarely listen unless they know exactly what they are looking for within the dull pages of research and the rolled out economic reports. Today, the homework has been done to save you time and guide you directly to what matters the most.
Analysts at The Goldman Sachs Group (NYSE: GS) have rolled out their 2024 macro outlook report, which summarizes their expectations for a breakout in the United States manufacturing sector. Why are they so confident? The FED’s new plan to cut interest rates may be a start.
Because the value of a currency is pegged to underlying interest rates, lower rates in the United States could bring a decline in the dollar index, but that’s not necessarily bad news. You see, a weaker dollar makes American exports all the more attractive to all other nations, and international firms will see the economic benefit of this trend.
It is stocked like Intel (NASDAQ: INTC), which saw its price sell-off by more than 10.0% in only a few days. Its sales exposure (and, increasingly, manufacturing exposure) is heavy on the domestic side. Electronics companies that depend on a strong U.S. consumer will likely see headwinds ahead, taking Logitech (NASDAQ: LOGI) and its decline as another example.
So now there are two differing camps at play: you either bet on the American semiconductor names that are starting to show cracks in their outlooks amid an expected lower dollar, or you can side with the international firms that can cushion these effects by spreading their sales and costs in other regions.
The market is siding with the latter, for reasons and analysis you will see in just a bit. Starting with price action, you can notice that Taiwan Semiconductor outperformed Intel stock by as much as 25.0% in the past month. A start like this in the year can only mean that the big players are placing their bets already.
Reading the tape
Spreading out the semiconductor names as a group, this idea starts to take on water. At the bottom of the valuation list (a list breakdown will be here in a second), you can find names like Skyworks Solutions (NASDAQ: SWKS) offering shareholders a deep discount. Others like Broadcom (NASDAQ: AVGO) offering not so great a deal.
Coming to conclusions from the forward price-to-earnings ratio, which is the market’s way to value tomorrow’s expected earnings, you can see why this dynamic might work.
Skyworks stock trades at a 12.8x forward P/E, a 41.1% discount to the sector’s average 21.8x multiple. The saying “It must be cheap for a reason” often applies to stocks that are trading cheaply, but this one may be an exception. Why? Analysts are projecting earnings per share growth of 21.7% in the next twelve months.
The rest of the industry is expected to bring an average EPS growth rate of only 16.2%, so why is the market discounting Skyworks stock? For starters, it is not a popular name; secondly, there is a misconception that its sales are also focused on American markets only when, in reality, they are spread out across Europe and Asia.
Would you say that Broadcom is a more popular stock in this space? Some would agree, and this could be why the market is valuing that stock at 78.5% higher than Skyworks with its 22.9x forward P/E multiple. However, that stock is only set to grow its EPS by 19.2%.
That must be why these same analysts see a 10.9% upside in their Skyworks price targets when they are pointing to a net downside of 18.5% for Broadcom’s price targets. It would seem that the savvy investor – like yourself – could take advantage of this situation today.
