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The Semiconductor Industry is Showing Relative Strength: 2 Stocks to Join the Rally
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After a strong start to 2023, the market has broadly chopped around for the last month. With the uncertainty of interest rate policy, inflation, and unemployment markets seem to be waiting for some clear signal on where to go next.
Amid the choppiness, the semiconductors industry has unequivocally outperformed the market recently.
Year to date, the semiconductor ETF (SMH - Free Report) has climbed 22%, massively outperforming the 5% return in the S&P 500.
Image Source: Zacks Investment Research
This strong performance comes after a grueling 2022, where SMH experienced a near -50% drawdown, and some individual stocks were down more than that. Three factors enabled this rebound; economic growth remained robust, Fed policy became more dovish, and semiconductor stocks were oversold and trading at a discount.
Image Source: TradingView
Whether these factors will continue to aid in the strength of the semiconductor stocks is unknown, but focusing on leading sectors, with improving earnings, is one effective way to trade markets. Here I will share two highly-ranked semiconductor stocks to consider buying in March.
Cadence Design Systems
Cadence Design Systems (CDNS - Free Report) offers products and tools that help customers design electronic products. Through System Design Enablement (SDE) strategy the company offers software, hardware, services, and reusable designs for electronic systems and semiconductor customers. Cadence has an extremely diversified hardware product portfolio and is expanding its software offerings.
CDNS is likely to benefit from long-term secular mega-trends which boosts design activity growth across semiconductor and system companies.
Cadence Design Systems stock currently has an extremely compelling setup. CDNS stock just broke out of a massive technical consolidation. The last nine weeks show consistent institutional buying which has pushed the stock to new all-time highs.
Image Source: TradingView
Additionally, CDNS has a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. The uptrend is evident in the chart below.
Image Source: Zacks Investment Research
CDNS sales haven’t missed a beat, and current quarter sales are expected to jump 12% to $1 billion, while earnings are expected to climb 7% to $1.25 per share. The current year’s estimates are even stronger, with sales projected to grow 13.4% to $4 billion and earnings expected to grow 16.4% to $4.97 per share.
Analysts are in unanimous agreement in revising earnings expectations higher and all timeframes have been revised higher by as much as 25%.
Image Source: Zacks Investment Research
CDNS has been a phenomenally strong stock over the long-term as well. Over the last ten years Candence Design Systems has compounded at an annual rate of 30%, nearly 3x that of the S&P 500’s 12% average. That outperformance has rocketed CDNS stock up 1300% over that time.
Image Source: Zacks Investment Research
CDNS does not come cheap. With such strong expectations, the stock is currently trading at 50x one-year forward earnings, although this is still below its three-year median of 55x.
Image Source: Zacks Investment Research
Microchip Technology
Microchip Technology (MCHP - Free Report) develops, manufactures, and sells smart, connected, and secure embedded control solutions in the Americas, Europe, and Asia. MCHP has a comprehensive product portfolio serving over 120,000 customers across the industrial, automotive, aerospace and defense, communications, and computing industries.
MCHP boasts a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. Current quarter sales are expected to grow 20% to $2.2 billion, and earnings are projected to grow 19% to $1.61 per share over the same period. Full-year sales are expected to be $8.4 billion, a 24% YoY increase, while earnings are expected to climb 30% to $5.99 per share.
Image Source: Zacks Investment Research
Analysts are in near unanimous agreement in upgrading MCHP’s earnings estimates over the last two months.
Image Source: Zacks Investment Research
MCHP has an intriguing technical setup as well. Just this week the stock broke out of a bull flag, indicating strong upward momentum. So long as the stock continues to trade above $82 per share, the setup remains intact.
Image Source: TradingView
Microchip Technology is trading at a one-year forward earnings multiple of 14x, below its five-year median of 17x, and below the industry average of 18x. MCHP also offers a dividend yield of 1.8%, which it increased 40% over the last year.
With a much more reasonable valuation than CDNS, these two picks allow for a complimentary mix of semiconductor stocks.
Image Source: Zacks Investment Research
Conclusion
Semiconductor stocks are clearly benefiting from momentum. Sometimes in markets strength begets more strength, and that is clearly happening here. When trading momentum, you want to be sure to stick with what works and drop what doesn’t. The best momentum stocks can go up and feel like they’re never going to stop, but they eventually do. Be mindful of your position sizing, set a trailing stop-loss, and respect your trading plan.
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The Semiconductor Industry is Showing Relative Strength: 2 Stocks to Join the Rally
After a strong start to 2023, the market has broadly chopped around for the last month. With the uncertainty of interest rate policy, inflation, and unemployment markets seem to be waiting for some clear signal on where to go next.
Amid the choppiness, the semiconductors industry has unequivocally outperformed the market recently.
Year to date, the semiconductor ETF (SMH - Free Report) has climbed 22%, massively outperforming the 5% return in the S&P 500.
Image Source: Zacks Investment Research
This strong performance comes after a grueling 2022, where SMH experienced a near -50% drawdown, and some individual stocks were down more than that. Three factors enabled this rebound; economic growth remained robust, Fed policy became more dovish, and semiconductor stocks were oversold and trading at a discount.
Image Source: TradingView
Whether these factors will continue to aid in the strength of the semiconductor stocks is unknown, but focusing on leading sectors, with improving earnings, is one effective way to trade markets. Here I will share two highly-ranked semiconductor stocks to consider buying in March.
Cadence Design Systems
Cadence Design Systems (CDNS - Free Report) offers products and tools that help customers design electronic products. Through System Design Enablement (SDE) strategy the company offers software, hardware, services, and reusable designs for electronic systems and semiconductor customers. Cadence has an extremely diversified hardware product portfolio and is expanding its software offerings.
CDNS is likely to benefit from long-term secular mega-trends which boosts design activity growth across semiconductor and system companies.
Cadence Design Systems stock currently has an extremely compelling setup. CDNS stock just broke out of a massive technical consolidation. The last nine weeks show consistent institutional buying which has pushed the stock to new all-time highs.
Image Source: TradingView
Additionally, CDNS has a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. The uptrend is evident in the chart below.
Image Source: Zacks Investment Research
CDNS sales haven’t missed a beat, and current quarter sales are expected to jump 12% to $1 billion, while earnings are expected to climb 7% to $1.25 per share. The current year’s estimates are even stronger, with sales projected to grow 13.4% to $4 billion and earnings expected to grow 16.4% to $4.97 per share.
Analysts are in unanimous agreement in revising earnings expectations higher and all timeframes have been revised higher by as much as 25%.
Image Source: Zacks Investment Research
CDNS has been a phenomenally strong stock over the long-term as well. Over the last ten years Candence Design Systems has compounded at an annual rate of 30%, nearly 3x that of the S&P 500’s 12% average. That outperformance has rocketed CDNS stock up 1300% over that time.
Image Source: Zacks Investment Research
CDNS does not come cheap. With such strong expectations, the stock is currently trading at 50x one-year forward earnings, although this is still below its three-year median of 55x.
Image Source: Zacks Investment Research
Microchip Technology
Microchip Technology (MCHP - Free Report) develops, manufactures, and sells smart, connected, and secure embedded control solutions in the Americas, Europe, and Asia. MCHP has a comprehensive product portfolio serving over 120,000 customers across the industrial, automotive, aerospace and defense, communications, and computing industries.
MCHP boasts a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. Current quarter sales are expected to grow 20% to $2.2 billion, and earnings are projected to grow 19% to $1.61 per share over the same period. Full-year sales are expected to be $8.4 billion, a 24% YoY increase, while earnings are expected to climb 30% to $5.99 per share.
Image Source: Zacks Investment Research
Analysts are in near unanimous agreement in upgrading MCHP’s earnings estimates over the last two months.
Image Source: Zacks Investment Research
MCHP has an intriguing technical setup as well. Just this week the stock broke out of a bull flag, indicating strong upward momentum. So long as the stock continues to trade above $82 per share, the setup remains intact.
Image Source: TradingView
Microchip Technology is trading at a one-year forward earnings multiple of 14x, below its five-year median of 17x, and below the industry average of 18x. MCHP also offers a dividend yield of 1.8%, which it increased 40% over the last year.
With a much more reasonable valuation than CDNS, these two picks allow for a complimentary mix of semiconductor stocks.
Image Source: Zacks Investment Research
Conclusion
Semiconductor stocks are clearly benefiting from momentum. Sometimes in markets strength begets more strength, and that is clearly happening here. When trading momentum, you want to be sure to stick with what works and drop what doesn’t. The best momentum stocks can go up and feel like they’re never going to stop, but they eventually do. Be mindful of your position sizing, set a trailing stop-loss, and respect your trading plan.