Bloomberg News

Semiconductor Bulls Eye Seasonal Lag to Buy: EcoPulse

April 25, 2014

Semiconductor Chips

The S&P semiconductor index has risen 14 percent since Dec. 31. Photographer: Victor J. Blue/Bloomberg

Investors bullish about U.S. economic growth might wait to buy shares of semiconductor companies until June or July, when these stocks historically lag behind the market.

On a trailing 10-year basis, the Standard & Poor’s Semiconductor Select Industry Index has trailed the S&P 500 Index (SPX) by an average of 1.8 percentage points in June and 2.2 percentage points in July, data compiled by Bloomberg show. These stocks have underperformed the market at least one of these months in eight of the past 10 years.

So even after a “strong run” for the shares this year, traders “may get another chance to buy on weakness in the June-to-July timeframe,” said Matt Maley, an equity strategist in Boston with Miller Tabak & Co. That’s because historic trends could be exacerbated this year by some investors “pulling in their horns” -- selling high-beta stocks including semiconductors -- in an attempt to mitigate risk.

A stock with a high beta tends to rise or fall more than the broader market.

The S&P semiconductor index -- which includes Intel Corp. (INTC:US) and Texas Instruments Inc. (TXN:US) -- has risen 14 percent since Dec. 31. That compares with a 1.6 percent gain for the S&P 500 Index.

These stocks are attracting interest among investors optimistic about the U.S. economy, believing capital spending will increase this year, Maley said. That has left some traders in a conundrum: chase the group’s gains or wait to buy, betting the equities adhere to their seasonal trading pattern.

Increased Spending

Total information-technology spending is on pace to grow 3.2 percent worldwide to $3.8 trillion this year, following a 0.4 percent increase last year, industry researcher Gartner Inc. said April 2. That’s up slightly from Gartner’s January forecast of 3.1 percent.

The S&P 500 also tends to be weak in the summer -- adhering to the adage “sell in May and go away” -- and it makes sense that shares of chip- and processor-makers follow suit because they’re even more volatile than the benchmark and are “a high-beta play” on economic prospects, according to Brian Jacobsen, who helps oversee $241 billion as chief portfolio strategist in Menomonee Falls, Wisconsin, at Wells Fargo Advantage Funds.

The June-August period has been marked by “growth scares” the past three years in the U.S. and Europe, contributing to the summertime sell-offs, Jacobsen said. “If we see some softness in the stock market this summer, it will be more pronounced in semiconductors.”

Unleash Cash

Any such weakness would follow stronger-than-average gains earlier this year, Jacobsen said, adding that investors are anticipating businesses will “unleash cash from corporate balance sheets to do major reinvestments in capital expenditures.”

Those gains have signaled one break in the seasonal pattern: The semiconductor index led the S&P 500 each month in January-March, according to data compiled by Bloomberg. If April’s gains hold -- the group currently is outpacing the benchmark by 0.9 percentage points -- this will mark only the second time since 2000 these stocks have outperformed the market in the first four months of the year.

The industry is very cyclical, with stock performance usually weakest in the first quarter after the seasonally strongest October-December period, which benefits from the holidays and year-end information-technology purchases, known as budget flushes, according to Betsy Van Hees, an analyst at Wedbush Securities in San Francisco.

‘Severe’ Imbalance

These companies also been “plagued” by a “severe supply-demand imbalance” for several years -- with production exceeding orders -- though they have made significant improvements since 2000, she said.

Businesses now are more cautious about adding capacity, and the supply chain is “considerably more efficient than it’s ever been,” Van Hees said. The industry also is the “healthiest that it has been in a long time,” which has piqued investor interest in the group. Similarly, Jacobsen has been hearing from portfolio managers who are “really excited” about semiconductor stocks this year, he said.

While these shares were “under-owned” after trailing the market for most of 2011 and 2012, money has been flooding into them more recently as the fundamental outlook has improved, said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. That’s reflected by increasingly bullish sentiment, particularly among strategists, that might eclipse the historically weak period ahead.

Weak Results

“Investors waiting for lower prices to buy may not get that chance this year,” he said. That’s because these stocks could continue to attract investment, even in the face of weak company results.

Shares of Linear Technology Co. (LLTC:US) fell 4.4 percent April 16, the day after it cut guidance (LLTC:US) for fiscal fourth-quarter sales and reported revenue for the period ended March 30 that missed analysts’ forecasts. In about a week, the stock has recouped nearly all of that one-day loss.

This shows investors brushed off weak results, as a bullish outlook prevails. They and analysts have realized the personal-computer industry isn’t dead, a popular theme that’s been proven wrong, Maley said. Meanwhile, these stocks provide a viable bet on increased spending by companies to improve communications infrastructures in the U.S. and emerging markets, Jacobsen said.

Best-Idea List

The fundamental outlook for demand of products ranging from microprocessors to memory chips remains intact for most companies within this industry, Van Hees said. Advanced Micro Devices Inc. (AMD:US) is on Wedbush’s “best-idea list” because it’s “the most underappreciated turnaround story in 2014.” The Sunnyvale, California-based company is diversifying beyond computers to make chips for game consoles while broadening its footprint across the three largest original equipment makers of personal computers, she said.

Similarly, Van Hees reiterated her outperform recommendation for Micron Technology Inc. (MU:US) earlier this month after the largest U.S. maker of memory chips reported “solid” fiscal second-quarter results that beat the consensus of analysts’ estimates.

It’s also the latest example of a successful industry consolidation, she said. Shares of the Boise, Idaho-based company have risen almost 108 percent since July 31, when it acquired Japanese rival Elpida Memory Inc.

As semiconductor stocks have become “particularly attractive,” investors must decide whether a summertime slowdown would be a profitable buying opportunity, Jacobsen said. Even for those who are sympathetic to the bull case, it’s a question of when to allocate more money to a group that’s already rallying year-to-date, Maley added.

A wait-and-see approach could pay off, as “investors may have another opportunity to buy at lower prices.”

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editors responsible for this story: Anthony Feld at afeld2@bloomberg.net Melinda Grenier


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