Many of the market’s top semiconductor companies have watched their momentum run out of steam in recent months, and that means investors might want to think about reducing their exposure to chip stocks, especially those that have been underperforming lately.
There are still plenty of reasons to be bullish on semiconductors as a whole, with niche chipmakers delivering quality solutions for new secular growth markets like IoT, AI, and autonomous vehicles.
But as a whole, semiconductor manufacturers have started to feel volatility at levels which have not been felt for years. For instance, the VanEck Vectors Semiconductor ETF (SMH) is on track for its first negative quarter since the third quarter of 2015.
A lot of this negative pressure is coming from sluggish guidance among top semiconductor firms, and for investors, that should also cause concerns down the supply chain and into chip equipment companies. One particular supplier to be weary of right now is Ichor Holdings (ICHR).
Before diving into Ichor specifically, we should note that some analysts have begun pointing to semis as a potential source of continued volatility.
“Tech is fine. However, semis is the part of the sector that you want to stay away from,” said Oppenheimer analyst Ari Wald on CNBC’s “Trading Nation” this week. “It’s losing its leadership. Versus the tech sector this industry has been making lower highs since March. It’s really starting to break down more recently. This is a warning.”
The SMH fund is made up of the 25 largest chip stocks traded on U.S. exchanges, so ICHR is not a holding. But as a key supplier of subsystems and engineering solutions to this industry, Ichor is going to be influenced by the health of these businesses.
This industry volatility is already causing pressure on Ichor’s earnings outlook. Within the past 30 days, the Zacks Consensus Estimate for ICHR’s 2018 earnings has slumped 10 cents, and the company has witnessed negative revisions to its current quarter, next quarter, and full-year EPS estimates recently.
This negative revision activity has earned ICHR a Zacks Rank #5 (Strong Sell). Shares have lost nearly 10% over the past year, including a 15% drop in just the past month.
Some investors might notice that this selloff has dragged the stock into an interesting value territory, with shares now trading at just 5.7x forward earnings. Indeed, ICHR is holding a “B” grade in the Value category of our Style Scores system and might be looking undervalued to some.
But the stock has significantly underperformed its peers, and we’re just starting to the aforementioned problematic industry trends. Why jump into an underperforming stock in a volatile industry right now?
ICHR might end up in a better spot if semis can shake off this volatile stretch, but for now, it looks safer to keep this stock on the sidelines.
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