US chip stocks show signs of slow­ing Wall St Week ahead

Kuwait Times - - BUSINESS -

High-fly­ing semi­con­duc­tor stocks may be poised for more losses in the com­ing weeks as a large swath of chip names re­ports quar­terly re­sults in a sec­tor that may have run up too far for some in­vestors.

In­vestors will parse earn­ings from 40 per­cent of the com­po­nents in the PHLX semi­con­duc­tor in­dex over the next month, in­clud­ing Ap­plied Ma­te­ri­als, Nvidia and Marvell Tech­nol­ogy.

The in­dex is up more than 20 per­cent on the year, pow­ered by gains of nearly 60 per­cent in names such as Nvidia and Lam Re­search, which has helped pro­pel the S&P tech­nol­ogy sec­tor higher as the best per­form­ing of the 11 ma­jor S&P sec­tors. Only five of the 30 names in the semi­con­duc­tor in­dex are in neg­a­tive ter­ri­tory for the year.

Those gains were fu­eled by ex­pec­ta­tions of strong earn­ings and rev­enue for the quar­ter. Semi­con­duc­tor and semi­con­duc­tor equip­ment stocks are ex­pected to see the high­est growth within the tech sec­tor, with year-over-year earn­ings growth of more than 40 per­cent, ac­cord­ing to Thom­son Reuters data.

“The semis are the heart and soul of the tech­nol­ogy sec­tor, par­tic­u­larly the large-cap tech­nol­ogy sec­tor, and they are re­ally driv­ing the theme that we saw re­ally take shape in the sec­ond quar­ter,” said Peter Kenny, se­nior mar­ket strate­gist at Global Mar­kets Ad­vi­sory Group in New York.

“The ques­tion is are they go­ing to be able to con­tinue to do it and even if they are, which the street is ex­pect­ing, there is a case to be made for stretched val­u­a­tions trig­ger­ing a lit­tle bit of ro­ta­tion out of the space.” Ini­tial stock move­ments in the wake of those that have al­ready re­ported sug­gest some in­vestors are ready to lighten up. The av­er­age 1-day stock per­for­mance has been a de­cline of 1.2 per­cent for semi­con­duc­tor com­pa­nies that re­ported earn­ings through Wed­nes­day.

The semi­con­duc­tor in­dex was poised for its first weekly drop in four and was on track for its fifth drop in six ses­sions, with de­clines on Fri­day com­ing on the heels of re­sults from Cy­press Semi­con­duc­tor, In­terDig­i­tal, Mi­croSemi Corp and In­tel.

“A year ago I would say you have to be care­ful but now I’d say you have to be ex­tremely care­ful,” said Kim For­rest, se­nior eq­uity re­search an­a­lyst at Fort Pitt Cap­i­tal Group in Pitts­burgh.

“The ones that have these ex­otic sto­ries and high growth are prob­a­bly frothy.”

The for­ward price-to-earn­ings (P/E) ra­tio of the S&P 500 semi­con­duc­tor and semi­con­duc­tor equip­ment in­dex stands at 15.2, above its five-year av­er­age of 14.4 but be­low the for­ward P/E of the broader S&P 500 of nearly 18.

In ad­di­tion, the 14-day rel­a­tive strength in­dex read­ing for the PHLX Semi­con­duc­tor in­dex stands at 51.6, be­low the 70 level that in­di­cate an over­bought con­di­tion, which sug­gests the sec­tor may still have room to run higher. “The ex­pec­ta­tions are high in terms of growth rates: you keep rais­ing the bar, rais­ing the bar; even if you hit the num­ber or get a penny over, it’s not good enough any­more,” said Daniel Mor­gan, port­fo­lio man­ager at Synovus Trust in At­lanta, Ge­or­gia.

“You are get­ting some mis­matched trad­ing re­lated to earn­ings re­ports com­ing out; it cre­ates some op­por­tu­ni­ties to be in some great names where the fun­da­men­tal themes are still in place.” — Reuters

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