By Philip van Doorn
Just about every investor is aware that a shortage of semiconductors and related equipment, including microprocessors and chips, are in short supply while demand is high. And yet the stocks of this critical group trade relatively low to the broader stock market.
Below is a list of favorite semiconductor stocks among Wall Street analysts, based on a deep dive into the holdings of five exchange traded funds focused on the industry.
The chip shortage isn’t the whole story — innovation and new business have lit fires under some of the best-known semiconductor companies. Shares of Nvidia Corp. /zigman2/quotes/200467500/composite NVDA +1.96% were up 49% from the end of September through Nov. 8, while Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD +3.73% was up 46%.
These articles help explain the big moves:
Industry appears cheaply valued
The PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX +1.93% is considered the benchmark index for chip makers and companies that make equipment and systems used by them. It is tracked by the iShares Semiconductor ETF /zigman2/quotes/209255350/composite SOXX +1.86% , which holds all 30 stocks in the index and is weighted by market capitalization.
This means Nvidia is the top holding, making up 9.7% of the portfolio, and the top five investments, which also include Broadcom Inc. /zigman2/quotes/200646538/composite AVGO +0.61% , Intel Corp. /zigman2/quotes/203649727/composite INTC +1.11% , Qualcomm Inc. /zigman2/quotes/206679220/composite QCOM +1.20% and Texas Instruments Inc. /zigman2/quotes/202237907/composite TXN +2.36% , account for 35.3% of the ETF’s assets. The sixth-ranked company, AMD, is 4.5% of the portfolio.
SOXX trades at a forward price-to-earnings ratio of 20.9, based on consensus estimates among analysts polled by FactSet, while the forward P/E for the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.46% is 21.7. It’s not unusual for the semiconductors to trade at a discount. However, it is unusual for there to be a broad shortage of the industry’s products.
Here’s how SOXX has traded relative to the S&P 500 over the past 10 years:
Underlining the discount for the semiconductor group is the expectation that the group will increase its sales and earnings much more quickly over the next two years.
Here are expected compound annual growth rates (CAGR) for sales and earnings per share through 2023, based on weighted consensus estimates among analysts polled by FactSet:
|Estimated sales per share|
|2021||2022||2023||Expected two-year sales CAGR|
|iShares Semiconductor ETF||$77.72||$85.64||$94.61||10.3%|
|2021||2022||2023||Expected two-year EPS CAGR|
|iShares Semiconductor ETF||$22.17||$23.97||$35.59||26.7%|
ETF deep dive
To look beyond the SOXX 30, we reviewed five ETFs that follow different approaches, to come up with a broader initial list of stocks: