The Best Way To Profit From The Semiconductor Industry
Wall Street Daily | Jun 21, 2017 04:50AM ET
- Ignore the hyperbole surrounding tech’s demise.
- One corner of the market boasts untapped potential.
- Four-letter ticker symbol included below.
Tech Tantrum… Tech Wreck… Tech Tank…
If you follow stocks, you’ve seen one or more of these clever terms to describe the steep sell-off in technology names last week.
To be sure, Technology Select Sector SPDR (NYSE:XLK)— the exchange-traded fund that tracks large-cap tech — fell 2.5% two Fridays ago.
That’s the fund’s second largest one-day drop of the year.
Yes, enthusiasm for tech stocks is palpable.
But as senior analyst Jonathan Rodriguez points out below, there’s a good reason for it. And he’ll reveal one of the sector’s biggest bargains.
Ahead of the tape,
h3 Be Not Afraid… Be Greedy/h3Man, you can really cut through the market’s fear with a knife.
Between the Trump administration, the pending divorce of the United Kingdom from the European Union and China’s growth by debt expansion…
There’s a lot on the minds of investors these days.
Flip on the tube and the talking heads are fueling the fire with contradicting bullish and bearish takes.
Yes, valuations are high and stocks will correct at some point. Heck, we may even see a bear market in equities in the next few years.
But make no mistake, as long as corporate earnings are rising and interest rates are low, this market will continue to rally.
And the sector leading the charge for U.S. stocks by far is — you guessed it — tech.
In the first quarter of 2017, 84% of large-cap tech firms beat second-quarter analyst earnings estimates, according to FactSet.
That’s nine percentage points higher than the S&P 500 (75%), and a larger beat rate than any other sector.
It gets better…
FactSet also notes that earnings for the semiconductor industry are expected to grow by 40% in the second quarter.
As you know, semiconductors are at the heart of every electronic device on the planet.
And with 2.5 billion devices expected to ship worldwide next year — up 6% from 2015, according to Gartner — the $34 billion semi industry isn’t slowing down anytime soon.
However, semiconductor names aren’t cheap by any means.
The benchmark Philadelphia Semiconductor Index is currently trading at 29 times trailing earnings — a 55% premium to the Nasdaq Composite Index.
But I’ve got a way to play incredible upside in chips without the hefty surcharge…
h3 The Cheat Code to Play Chips Cheap/h3Ichor Holdings Ltd (NASDAQ:ICHR) is a California-based semiconductor services company.
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And this tiny industrial firm — boasting a market capitalization of just $613 million — is one of tech’s biggest hidden bargains.
Ichor specializes in fluid delivery subsystems for semiconductor capital equipment.
I know that’s a mouthful. So let me break it down for you…
The semiconductor capital equipment industry builds the machines that companies use to produce chips.
Ichor specializes in the systems that companies use to precisely deliver the chemical fluids needed to build semiconductors.
Some of their customers include Applied Materials Inc (NASDAQ:AMAT). and Lam Research Corp (NASDAQ:LRCX). — two of America’s largest chipmakers.
Sales have exploded over the last three years. The company booked revenue of $405.7 million in 2016 — a 40% increase from the previous year.
And after two years of posted losses in 2014 and 2015, the company swung to a profit last year of $3.66 per share.
Analysts expect sales to rise this year to $576 million — a rise of 42%, and three times the growth of the industry (14.4%).
Fiscal 2017 earnings are also expected to grow 56% — from $1.32 to $2.05 — compared with the industry’s 36% growth rate.
Despite Ichor’s phenomenal growth, however, the company trades at a mere 10 times forward earnings — well below the industry average (35.5).
The company also trades at 0.8 enterprise value to sales. That’s less than half the industry multiple (1.9x).
Bottom line: Fueled by strong earnings growth, the uptrend in tech is far from dead. And the bargain-priced Ichor allows investors to capture the juicy upside in semiconductors without taking on the premium valuation in chip stocks.
On the hunt,
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