5 Semiconductor Stocks That Warrant A Closer Look

 | Apr 27, 2017 02:24AM ET

Much has been said about semiconductor stocks lately, with some of the opinion that the secular growth drivers will continue to push them up and others taking the more cautious approach that such appreciation may be risky because they are already fully valued. Neither position can be completely ruled out. But it may be worthwhile to drill down a little deeper to identify the names that still have upside potential.

And what better way than to start with than the Zacks Industry Rank, which is based on the philosophy that about half of a stock’s price movement can be attributed to the group (sub-industry) that it’s in. In fact, Zacks studies have shown that the top 50% of Zacks ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

So today, we are going to take a closer look at the semiconductor analog & mixed signal group , which is in the top 10% of Zacks-ranked industries.

The group has slightly outperformed the S&P 500, having appreciated 5.5% compared to the 4.8% for the S&P 500.

Sector revenues have grown in each of the last four years with the jump in 2016 being particularly high (up 31.4%). Gross profit (up 26.3% in 2016) and net income before non-recurring items (up 16.4%) show similar trends. However, the industry is investing heavily in R&D and SG&A (up 65.0% in 2016 although moving both ways in preceding years) and unlike in the past, it’s tapping into the debt market to do it (interest expenses are up 134.5% in 2016 and up double digits in each of the three preceding years.

A quarterly cross section shows revenues rising steadily from the Sep 2015 quarter. Gross profit dipped in the Mar 2016 quarter but barring that one quarter shows a rising trend from Dec 2014. Net income before non-recurring items has risen since Mar 2016. As with the annual trend, the quarterly performance shows rising operating expenses and capex spend (using depreciation as a proxy), as well as rising interest rates.

If you add the above data to secular growth drivers like machine learning, artificial intelligence, self-driving cars, IoT, industrial and medical technology, drones (the list is almost never-ending), it’s clear that this is a growth segment. So while momentum trading opportunities may be there in some cases, they may not be what value buyers are looking for.