Why Semiconductors Are Due For A Comeback (SMH, INTC, AMD)
Tom Essaye: Since the market topped back in mid-September the Nasdaq has traded very poorly, falling more than 6 percent while the Dow Jones Industrial Average and the S&P 500 declined somewhat less.
But just looking at the averages’ performance isn’t enough — you have to look at whyan average is underperforming.
Technology is one sector that has been under a lot of pressure. It’s been hit hard by weak trading in semiconductors. And as you can see in the chart below, semis have fallen more than 10 percent since mid-September, making it one of the worst performing sub-sectors in the market.
The reason for the underperformance: Semiconductor companies, such as Intel (NASDAQ:INTC) and Advanced Micro-Devices (NASDAQ:AMD), have been warning of lower profits for the foreseeable future.
Why the bleak forecasts?
Weak PC demand.
PC demand is falling sharply as tablets and advanced smart phones cut into the PC market. What’s more, PC sales have been slow because IT departments and other consumers have held off buying new machines waiting for Microsoft’s upgrade — Windows 8. The same thing happened earlier this summer when Apple reported earnings miss as consumers waited for the arrival of the iPhone 5.
It’s gotten so bad in the PC market that this weekend the cover story on Barron’s was “The Death of the PC.”
But as contrarians we have to …
Look Beyond the Obvious to Sniff out Any Potential Investment Opportunities
As a rule, whenever a major publication like Barron’s declares something “dead” it’s worth a look from a contrarian perspective. So as I look across the semiconductor industry, I see some signs of hope …
First, the PC is not going away. And while tablets have certainly cut into demand, there will always be demand for PCs as tablets simply can’t replace many functions of a PC.
Second, given the terrible earnings results of many companies in the semiconductor industry and the gloomy outlooks, the case can be made that the worst-case scenario is already priced in. And from a valuation perspective, that makes a case for investing.
|Once released, this latest version could fire up PC sales.|
Third, although waiting for the release of Windows 8 slowed PC demand, it should also cause an uptick in PC demand once the release is official and companies move to upgrade their computers.
Finally, the U.S. economy is showing some signs of life, as last week’s retail sales numbers beat expectations. And consumer credit figures and confidence measures show that the consumer is starting to feel a bit better about the economy, and is starting to spend some money again.
So if you like contrarian opportunities in beaten down sectors where pessimism reigns, semiconductors might be what you’re looking for.
To make a contrarian play on this sector, you could buy the Market Vectors Semiconductor ETF (NYSEARCA:SMH). It’s a good collection of semiconductor companies, including Intel, Texas Instruments, and Analog Devices, and should rally when the “semis” make a comeback.
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, and Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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