Chip stocks show signs of
slowing with more earnings on tap
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[July 29, 2017]
By Chuck Mikolajczak
NEW YORK (Reuters) - High-flying
semiconductor stocks may be poised for more losses in the coming weeks
as a large swath of chip names reports quarterly results in a sector
that may have run up too far for some investors.
Investors will parse earnings from 40 percent of the components in the
PHLX semiconductor index <.SOX> over the next month, including Applied
Materials <AMAT.O>, Nvidia <NVDA.O> and Marvell Technology <MRVL.O>.
The index is up more than 20 percent on the year, powered by gains of
nearly 60 percent in names such as Nvidia and Lam Research <LRCX.O>,
which has helped propel the S&P technology sector <.SPLRCT> higher as
the best performing of the 11 major S&P sectors. Only five of the 30
names in the semiconductor index are in negative territory for the year.
Those gains were fueled by expectations of strong earnings and revenue
for the quarter. Semiconductor and semiconductor equipment stocks are
expected to see the highest growth within the tech sector, with
year-over-year earnings growth of more than 40 percent, according to
Thomson Reuters data.
"The semis are the heart and soul of the technology sector, particularly
the large-cap technology sector, and they are really driving the theme
that we saw really take shape in the second quarter," said Peter Kenny,
senior market strategist at Global Markets Advisory Group in New York.
"The question is are they going to be able to continue to do it and even
if they are, which the street is expecting, there is a case to be made
for stretched valuations triggering a little bit of rotation out of the
Initial stock movements in the wake of those that have already reported
suggest some investors are ready to lighten up. The average 1-day stock
performance has been a decline of 1.2 percent for semiconductor
companies that reported earnings through Wednesday.
The semiconductor index was poised for its first weekly drop in four and
was on track for its fifth drop in six sessions, with declines on Friday
coming on the heels of results from Cypress Semiconductor <CY.O>,
InterDigital <IDCC.O>, MicroSemi Corp <MSCC.O> and Intel <INTC.O>.
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"A year ago I would say you have to be careful but now I’d say you have to be
extremely careful," said Kim Forrest, senior equity research analyst at Fort
Pitt Capital Group in Pittsburgh.
"The ones that have these exotic stories and high growth are probably frothy."
The forward price-to-earnings (P/E) ratio of the S&P 500 semiconductor and
semiconductor equipment index <.SPLRCSE> stands at 15.2, above its five-year
average of 14.4 but below the forward P/E of the broader S&P 500 <.SPX> of
(For a graphic on 'Price and Forward P/E of Semiconductor and Semiconductor
Equipment Index' click http://reut.rs/2h9FlLC)
In addition, the 14-day relative strength index reading for the PHLX
Semiconductor index stands at 51.6, below the 70 level that indicate an
overbought condition, which suggests the sector may still have room to run
"The expectations are high in terms of growth rates: you keep raising the bar,
raising the bar; even if you hit the number or get a penny over, it’s not good
enough anymore," said Daniel Morgan, portfolio manager at Synovus Trust in
"You are getting some mismatched trading related to earnings reports coming out;
it creates some opportunities to be in some great names where the fundamental
themes are still in place."
(Reporting by Chuck Mikolajczak; Editing by James Dalgleish)
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