President Trump is playing what may be a long game with China as both countries apply tariffs before serious negotiations begin.
Shares of many U.S. semiconductor manufacturers and their suppliers have been hammered over the past week, as investors have learned about the potential effects of President Trump’s trade war with China. But a high level of volatility is customary for chip makers, even as long-term investors have made a lot of money with them in recent years.
Shares of Micron Technology MU, +0.94% dropped 15% last week, making it the worst performer among the 30 stocks in the PHLX Semiconductor Index SOX, +0.39% Micron projected lower-than-expected sales and earnings, saying one of the factors was Trump’s move to apply tariffs on another $200 billion in goods imported from China annually.
The jury is out as to whether Micron’s negative surprise signals an industry downturn or a short-term setback. But analysts aren’t happy. Then again, analysts base their stock ratings on 12-month price targets. That is not a long period for serious long-term investors, and the outperformance of semiconductors has been a long-term story. Impatient investors can easily lose their shirts with this group.
This chart shows the total return of the PHLX Semiconductor Index over the past five years against the S&P 500 Index SPX, -0.35% :
That’s very impressive outperformance, and as we’ll show below with sales and earnings figures, it’s really not much of a surprise. But the next two charts show how patient long-term investors had to be to enjoy those gains:
Once again, tremendous outperformance. But you can see that semiconductor stocks have not been moving in a straight line.
The charts above show total returns with dividends reinvested. This next action shows price action only for the PHLX Semiconductor Index over the past 12 months:
One way to invest in the 30 companies of the PHLX Semiconductor index as a group is the iShares PHLX Semiconductor ETF. An ETF that takes a somewhat different approach is the VanEck Vectors Semiconductor ETF SMH, +0.71% which tracks the MVIS US Listed Semiconductor 25 Index.
Over the past year, the PHLX Semiconductor Index has risen 20%, excluding dividends. But during that period, there have been several peaks and valleys:
• From the close on Nov. 24 through Dec. 14, the index declined 8%.
• From the close on Jan. 23 through Feb. 8, the index fell 13%.
• From the close on March 12 through April 6, the index dropped 12%.Then, following a 7% rally through April 17, the index decreased 8% through April 30. That added up to a 14% drop from March 12 through April 30.
• From the close on June 6 through July 3, the index was down 11%.
We could go on, but you probably get the point. The increase in demand for computer chips and memory as more and more devices are interconnected is a long-term story. Semiconductor companies as a group are booking tremendous increases in sales and earnings, but investors who play the group either have to be excellent short-term market timers or the patient type who can hold on for several years.
Here are projected weighted earnings and sales increases for the PHLX Semiconductor Index through 2020, based on estimates from analysts polled by FactSet:
|Projected increases in earnings per share|
|PHLX Semiconductor Index||25.3%||6.5%||6.9%|
|S&P 500 Index||21.8%||10.1%||9.8%|
|Projected increases in sales|
|PHLX Semiconductor Index||14.8%||5.6%||8.8%|
|S&P 500 Index||8.6%||5.0%||4.6%|
It’s pretty clear that analysts expect lower profit margins to put a drag on semiconductor companies’ earnings growth over the next two years. We’ll see.
In the meantime, the profit bounce from the massive cut in federal income tax rates for U.S. companies is playing a major part in this year’s big increase in profits. That has caused price-to-earnings ratios based on earnings estimates for the following 12 months to decline to 14.5 from 15.8 a year ago for the PHLX Semiconductor Index, while the forward P/E for the S&P 500 has declined to 16.9 from 17.8.
It’s interesting to see that even after many years of faster earnings and sales growth, along with overall outperformance for the stocks, there are enough nonbelievers out there to keep the semiconductors as a group quite cheap relative to the benchmark index. Short-term volatility puts a clamp on valuations even though the long-term story obviously favors the semiconductor manufacturers and their suppliers.
Here’s how the 30 companies in the PHLX Semiconductor Index have performed this year:
|Company||Ticker||Total return - 2018 through Sept. 21||Total return - Sept. 14 through Sept. 21||Total return - Aug. 31 through Sept. 21|
|Advanced Micro Devices Inc.||AMD, +5.13%||202%||-5%||23%|
|Broadcom Inc.||AVGO, +0.54%||-1%||6%||14%|
|Integrated Device Technology Inc.||IDTI, -0.13%||58%||0%||11%|
|Qualcomm Inc.||QCOM, -0.16%||18%||-2%||8%|
|Xilinx Inc.||XLNX, +0.52%||19%||1%||1%|
|Taiwan Semiconductor Manufacturing Co. ADR||TSM, +1.88%||14%||-1%||1%|
|Skyworks Solutions Inc.||SWKS, +1.10%||-2%||5%||1%|
|Maxim Integrated Products Inc.||MXIM, +0.35%||16%||3%||-2%|
|Qorvo Inc.||QRVO, -0.22%||18%||4%||-2%|
|Texas Instruments Inc.||TXN, -0.23%||7%||4%||-2%|
|Intel Corp.||INTC, +0.54%||3%||2%||-4%|
|Microchip Technology Inc.||MCHP, -0.54%||-5%||-1%||-4%|
|Silicon Laboratories Inc.||SLAB, +1.06%||6%||-1%||-4%|
|Analog Devices Inc.||ADI, +0.47%||8%||2%||-4%|
|Nvidia Corp.||NVDA, +0.85%||36%||-5%||-6%|
|Teradyne Inc.||TER, +0.63%||-8%||2%||-7%|
|Cypress Semiconductor Corp.||CY, -2.82%||6%||3%||-7%|
|Mellanox Technologies Ltd.||MLNX, +0.07%||19%||0%||-8%|
|Applied Materials Inc.||AMAT, -1.34%||-22%||1%||-8%|
|ASML Holding NV ADR||ASML, +1.61%||9%||2%||-8%|
|Marvell Technology Group Ltd.||MRVL, +0.16%||-12%||-1%||-9%|
|Cirrus Logic Inc.||CRUS, +0.63%||-23%||0%||-9%|
|Lam Research Corp.||LRCX, -0.60%||-14%||1%||-9%|
|SMART Global Holdings Inc.||SGH, -0.37%||-11%||-1%||-10%|
|MKS Instruments Inc.||MKSI, +0.12%||-11%||0%||-10%|
|KLA-Tencor Corp.||KLAC, -0.13%||1%||0%||-10%|
|ON Semiconductor Corp.||ON, -0.26%||-9%||-4%||-10%|
|Monolithic Power Systems Inc.||MPWR, -0.07%||19%||-4%||-11%|
|Entegris Inc.||ENTG, +0.83%||-1%||-2%||-12%|
|Micron Technology Inc.||MU, +0.94%||9%||1%||-15%|
You can click on the tickers for more information, including news, price ratios, financials, estimates and charts.
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Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.
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