Six of the Best Semiconductor Stocks to Buy Now Appear Undervalued

Paul Dykewicz

Cypress Semiconductor

Six of the best semiconductor stocks to buy now are trading at discounts compared to slower-growing industrial stocks.

S&P 500 semiconductor stocks trade at an average of 19x 2022 price-to-earnings (P/E) estimates, nearly 20% below the S&P 500 Industrials, despite free cash flow (FCF) margins 1,500-2,000 basis points (bps) above and 400-500 bp faster sales growth than the industrials, according to a May 11 BoA Global Research note. Semiconductor stocks share attributes with high-quality industrials, with the current relative weakness in semiconductor stocks indicated by the SOX index vs. industrials (XLI) showing market rotation rather than trading based on fundamentals, BoA reported.

The investment firm opined that semiconductor stocks are not expensive, since SPX industrials are trading at 27x 2021 estimated P/E vs. just 21x from semiconductor stocks, despite the latter generating 29% FCF margins or 2.4x that of industrials at 12% FCF. Plus, the impact of the ongoing chip shortage is not limited to semiconductor stocks, since it extends to their industrial and auto customers that are disproportionately impacted in the current cycle, BoA noted.

Six Best Semiconductor Stocks to Buy Now Aided by 5G, Broadband and U.S. Chip Making

Similar to industrial stocks, semiconductor companies benefit from U.S. infrastructure stimulus in 5G, broadband and domestic chip manufacturing. While double-ordering risks exist in semiconductor stocks, they are offset by “solid visibility” that is driven by non-cancellable orders, product customization and broad-based demand, BoA concluded.

Not to be overlooked is the recent upside in gross margins signaling that semiconductor companies are “very effective” in passing along rising input costs to turn inflation into a positive driver for the sector, BoA noted. As a result, the SOX index has benefitted from rising rates historically.

“Over the past five years, chip stocks have been among the best-performing NASDAQ stocks, with the Philadelphia Semiconductor Index (SOXX) up 4X, while the NASDAQ 100 (QQQ) is up 3X,” said Hilary Kramer, who hosts the nationally aired “Millionaire Maker” radio program and heads the GameChangers and Value Authority advisory services.

Valuations of Six Best Semiconductor Stocks to Buy Now Gain Money Manager’s Attention

Value investments had been trouncing growth stocks heading into trading on May 11, with the Russell 3000 Value Index up 19.1% in 2021, compared to a gain of 4.3% for the Russell 3000 Growth Index. Kramer wrote to her Value Authority subscribers on May 11 that she expects value stocks to keep outperforming growth stocks but suggested “a rest” would be overdue and healthy for the market.

The six best semiconductor stocks to buy now are trading at over 20X earnings estimates, suggesting the market growth will last beyond 2022, Kramer commented. But it is interesting to note that even with the recent chip shortage, semiconductor stocks have not performed well since early April.

Overall risk-reward characteristics of the semiconductor stocks is “not great,” but it can be said about the NASDAQ as well, Kramer counseled. End markets and earnings should be healthy if the economy remains firm, she added.

Paul Dykewicz conducts a pre-COVID-19 interview with Hilary Kramer, whose premium advisory services include IPO Edge, 2-Day TraderTurbo Trader and Inner Circle.

Applied Materials Ranks First Among Six Best Semiconductor Stocks to Buy Now

The top recommendation of BoA among the six semiconductor stocks to buy is Applied Materials, Inc. (NASDAQ: AMAT), a Santa Clara, California-based provider of materials engineering for computer chips and advanced displays. BoA’s price objective of $170 for AMAT is based on 25x 2022 estimated earnings per share (EPS), above the high end of a historical range of 8x-23x, but in line with the 1x-2x historical discount to more profitable peers.

Potential catalysts for AMAT’s share price include longer-than-expected electronics demand that would tighten semiconductor capacity, lift semiconductor equipment sales and boost market share. Downside risks to the price target for AMAT could come from a slower-than-expected capital spending cycle, a delay in memory capacity upgrades, market share loss in key segments, merger & integrations risk and macro-economic headwinds, BoA noted.

Chart courtesy of www.StockCharts.com

AMAT and two other large U.S.-based semiconductor vendors — Lam Research Corporation (NASDAQ:LRCX), a Fremont, California-based provider of wafer fabrication equipment and services to help chipmakers build smaller and faster electronic devices, and KLA Corp. (NASDAQ:KLAC), a semiconductor capital equipment company in Milpitas, California, trade at 20x average forward P/E. That P/E is two turns below the broad market, despite solid multi-year visibility, strong balance sheets and potential double-digit-percentage sales and EPS compound annual growth rate (CAGR) for the next 3-5 years, BoA noted.

Lam Research Ranks Among Six Best Semiconductor Stocks to Buy Now

BoA gave Lam Research a $725 price target, based on 20x cash adjusted 2022E P/E, within the stock’s historical range of 8x-24x and based on LRCX’s 20%-plus EPS growth rate. Amid a multi-year wafer fabrication equipment growth cycle, LRCX is well positioned to benefit, the investment firm wrote.

Potential upside catalysts to LRCX’s price objective are stronger-than-expected electronics demand that would tighten semiconductor capacity, increased semiconductor equipment sales and improved market share. Downside risks are a slower-than-expected capital spending cycle, a delay in memory capacity additions and a market share loss.

Chart courtesy of www.StockCharts.com

Six Best Semiconductor Stocks to Buy Now Include U.S.-based KLA Corp.

KLA Corp. gained a $400 price objective from BoA based on 22x 2022E P/E, within KLAC’s historical range of 10x-26x. The investment firm envisions KLAC as a key enabler of semiconductor manufacturing technology, offering a less cyclical topline, industry leading profit margins and best-in-class shareholder returns.

Risks to BoA’s price objective for KLAC are the cyclical nature of semiconductor capital spending and its impact on earnings, as well as competitive price and market share issues, particularly against Applied Materials. Another vulnerability would occur if trouble arose in bringing new products and technologies to market, BoA cautioned.

Chart courtesy of www.StockCharts.com

Nova Measuring Instruments Gets Berth as One of Six Best Semiconductor Stocks to Buy Now

Nova Measuring Instruments (NASDAQ:NVMI), a Rehovot, Israel-based provider of metrology devices for advanced process control used in semiconductor manufacturing, received a $108 price objective from BoA, based on 34x a 2022 estimated non-GAAP EPS that includes stock compensation and adjustments for net cash. The valuation is within its peer range of 20x-40x and is justified, BoA noted, due to Nova’s superior gross margin profile and its potential to outgrow the market in the next three years.

Downside risks for the stock could include an inability to earn share in new X-Ray metrology market, stiff competition from large rivals such as KLA Corp. and historically cyclical semiconductor capital spending. Nonetheless, BoA lists NVMI among the six best semiconductor stocks.

Chart courtesy of www.StockCharts.com

Six Best Semiconductor Stocks to Buy Now Feature Teradyne

Another of the six best semiconductor stocks to buy now is Teradyne, Inc. (NASDAQ:TER), a North Reading, Massachusetts-based maker of automatic test equipment. BoA’s $155 price objective on TER is based on 25x P/E, applied to a fiscal year 2022 estimated Non-GAAP EPS.

The expected P/E is at the high end of Teradyne’s long-term trading range of 12x-26x, given TER’s recent and unique exposure to 5G/automation, cyclical recovery in auto and industrial markets and market share gains in core semiconductor testing. Downside risks to the investment firm’s price objective are cyclicality and potential loss of market share in the core semiconductor test market, along with increasing competition in the robotics segment, BoA cautioned.

Chart courtesy of www.StockCharts.com

NVDA Gains Place Among Six Best Semiconductor Stocks to Buy Now

A BoA buy recommendation, NVIDIA Corporation (NASDAQ:NVDA), is a Santa Clara, California-based designer of graphics processing units for the gaming and professional markets, as well as chip units for the mobile computing and automotive markets. BoA highlighted trends at top cloud picks and noted NVDA showed solid data center visibility at its recent analyst day, with 2021 forecast to be a strong year with year-to-year growth of about 30%.

In addition, BoA described NVDA as having momentum that could accelerate after its introduction of its Grace-Arm-based server processor in 2023 that will be focused on the Giant AI/HPC portion of the market. NVDA is positioned to take advantage of its scale, data center presence and complementary silicon (GPU and DPU), as well as its software and development ecosystem, BoA added.

Further easing of cloud digestion and positive capital expenditure upside positive for NVDA led BoA to give the stock a $700 price target, based on 44x 2022 estimated P/E, excluding cash, at the higher-end of NVDA’s historical 20x-54x P/E range, showing NVIDIA’s superior long-term growth profile in large, underpenetrated markets, according to BoA.

Risks to achieving BoA’s price objective include NVDA’s exposure to the personal computer market, competition in accelerated computing markets and among auto vendors, “lumpy and unpredictable sales” in new enterprise, data center and auto markets, potential reduced capital returns, possible auto sales slowdown until advance driver-assistance systems (ADAS) become more meaningful and increased operational expenditures.

Chart courtesy of www.StockCharts.com

Semiconductor ETF Appeals to Pension Fund Chairman

“The semiconductor industry is going through major changes that are related more to politics and national security than technology,” said Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. “Asian companies have dominated the industry for a while. But the United States is concerned about national security, competition with China and supply chain problems. A heavy dependence on Asian semiconductor manufacturers presents the potential for geopolitical tensions to trigger restrictions on semiconductor supply.”

The semiconductor stocks are down from their highs due to these concerns, combined with revenue and earnings declines that are likely to be caused by the global semiconductor shortage, said Carlson, who also leads the Retirement Watch investment newsletter. It is a good time to invest in the stocks, particularly with a diversified portfolio through an exchange-traded fund (ETF), such as his choice of Invesco Dynamic Semiconductors ETF (NYSE Arca:PSI).

Chart courtesy of www.StockCharts.com

The top holdings in PSI recently were Applied Materials (AMAT), Lam Research Corporation (LRCX), Texas Instruments (TXN), Analog Devices (ADI) and Qualcomm (QCOM), Carlson said. 

Pension fund and Retirement Watch leader Bob Carlson answers questions from Paul Dykewicz prior to COVID-19-related social distancing.

Six Semiconductor Stocks to Buy Now Dodge Worst of COVID-19 Crisis

COVID-19 vaccination progress in recent weeks offers optimism that new cases and deaths due to the virus will keep slowing. Additional hope comes from the Food and Drug Administration (FDA) allowing a third COVID-19 vaccine to be put in to use.

Worldwide, COVID-19 cases have jumped to 159,697,341, with deaths of 3,317,685, as of May 12, according to Johns Hopkins University. Also on that date, U.S. COVID-19 cases have totaled 32,778,621 and led to 582,845 deaths. America has the dreaded distinction as the country with the most COVID-19 cases and deaths.

The six best semiconductor stocks to buy now provide investors with ways to pursue profits from a $1.9 trillion federal stimulus package, increased COVID-19 vaccine availability and an ongoing economic reopening. Those catalysts seem destined to build momentum for the six semiconductor stocks to buy now.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others.

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