Two major developments dominated market proceedings on Wednesday. On the one hand, tech stocks suffered losses, with chip stocks in particular bearing the brunt. Meanwhile, a nationalist stance on trade and the dollar emerged in Davos through statements of key members of the Trump administration.
On the one hand, a section of analysts believe that tech stocks are running out of steam and would find it difficult to replicate last year’s gains in 2018. On the other hand, a weaker dollar is likely to weigh on U.S. exports.
Chip Stocks Weigh on the Markets
Tech stocks weighed on the bourses over the last session with chipmakers in particular feeling the heat. Shares of Texas Instruments TXN lost 8.5% after the company released dismal projections for the current quarter. Other chipmakers followed suit, with Applied Materials AMAT declining by 1.6%.
Meanwhile, shares of Apple Inc. AAPL also lost 1.6% after Bernstein analyst Toni Sacconaghi said iPhone sales might come in weaker than expected in the coming spring. Also weighing of the broader index was a decline of 1.5%, 0.4% and 0.4%, respectively, in shares of Facebook FB, Amazon AMZN and Alphabet GOOGL.
Over the last few months, chipmakers have made massive strides. For instance, the VanEck Vectors Semiconductor ETF (SMH) is up 5.9% year to date and has gained 40.9% over the last one year.
However, a section of analysts believe that it may be difficult for the sector to sustain such gains. Analysts from Citi Investment Research feel that chipmakers’ business conditions have softened after a series of strong results.
Nationalist Position Emerges
Meanwhile, key members of the Trump administration espoused a nationalist position on trade and the dollar at the World Economic Forum in Davos. U.S. Commerce Secretary Wilbur Ross firmly elucidated the current administration’s muscular stance on trade. Ross also blamed China for been hiding its practice of trade protectionism under the veil of free trade.
Even more noteworthy comments were heard from his colleague U.S. Treasury Secretary Steven Mnuchin who said that the Trump administration favored “bilateral trade agreements.” Mnuchin added that any weakness in the dollar was beneficial for trade. His comments led to the ICE U.S. Dollar Index falling below the 90 mark for the first time since December 2014.
Can Chip Stocks Gain from a Weaker Dollar?
Mnuchin’s comments are something of a first, more so from a Treasury Secretary. In the past, U.S. administrations advocated a stronger dollar and urged other countries to work toward lowering their barriers to free trade. This new protectionist stance is a double edged sword. It could trigger off a trade war, leading to retaliations from the likes of China.
Further, a fall in the dollar could lead to a contraction in capital inflows which in turn could send yields shooting upward. This in turn could lead to unwelcome shocks for equity markets. Of course, Ross tried to backpedal on the Treasury Secretary’s remarks later, telling CNBC television that Mnuchin wasn’t calling for a weaker dollar.
However, such a scenario seems to be a little far-fetched at the moment. If a sovereign bond selloff does come about, it will be triggered by China which recently denied Bloomberg reports on the matter. In any case, such a move would be against China’s own interests in the long run.
So, as of now a weaker dollar would only be beneficial for major U.S. exporting sectors like semiconductors. In 2016, semiconductors were the third-largest exports, amounting to around $43 billion. This was likely the case for last year as well and despite alarms being raised over exorbitant valuations and a weaker business environment, chipmakers are likely to have another banner year.
Our Choices
Chipmakers have got off on the wrong foot in 2018. But this false start in no way detracts from their astounding performance last year as well as their future prospects. The slump in the dollar is likely to add to the luster of this major exporting sector.
Adding select chip stocks to your portfolios continues to make for a profitable option. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.
Micron Technology, Inc. MU has established itself as one of the leading worldwide providers of semiconductor memory solutions.
Micron Technology has a VGM Score of A. The company has expected earnings growth of 98.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 28.3% over the last 60 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Intel Corporation INTC is the world’s largest manufacturer of semiconductor products. The launch of Xeon Scalable, Core 8 chips, Myriad X and next-generation desktop processors are key catalysts for the company.
Intel has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 1.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 30 days.
Lam Research Corporation LRCX supplies wafer fabrication equipment and services to the semiconductor industry. Its products are used by semiconductor manufacturers in front-end and WLP processes, creating memory, microprocessors, and other logic integrated circuits for a broad range of electronic devices.
Lam Research has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 48.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days.
Xcerra Corporation XCRA engages in designing, manufacturing, and marketing automatic test equipment for the semiconductor industry.
Xcerra has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 98% for the current year. The Zacks Consensus Estimate for the current year has improved by 38.6% over the last 60 days.
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