Chip stocks have easily beaten the broader market, and some still offer incredible values
Semiconductor stocks have been in a sweet spot, as chip companies are taking advantage of industries transforming themselves in a new technological age.
The semiconductor industry, represented by the PHLX Semiconductor IndexSOX, +0.65% has easily outperformed the broader market.
Still, there’s plenty of value in the industry if you know where to look.
Here are a few charts to illustrate this point: the PHLX Semiconductor Index versus the S&P 500 Index over the past five years:
You can see that the semiconductors were more volatile than the S&P 500 during the market pullbacks in October and November 2014, the summer of 2015, early 2016 and June 2017. But the overall five-year result speaks for itself. The semiconductors roared ahead of the market. It paid for investors to be patient and ride out the declines.
Here’s a comparison of trailing price-to-earnings valuations for the two indices:
Shares in the PHLX Semiconductor Index trade for a weighted 23.1 times the past 12 months’ reported earnings, while the S&P 500 trades a bit lower, at 21.6 times. Both are at relatively high levels, but both are also supported by record earnings and accelerating economic growth in the U.S.
But if we look ahead, at price-to-earnings ratios based on weighted consensus earnings estimates among analysts polled by FactSet, we see something a bit different:
The PHLX Semiconductor Index is valued at 17.3 times consensus earnings estimates for the next 12 months, trailing the forward price-to-earnings ratio of 18.1 for the S&P 500. Yes, these valuations are based on estimates, but quarter after quarter, S&P 500 companies beat the estimates about 70% of the time.
All this makes it appear that the semiconductors as a group are a better value than the broader market. But if we take another look back, this idea is greatly strengthened by incredible earnings growth.
Companies making up the PHLX Semiconductor Index have earned a weighted $52.95 a share over the past 12 reported months through Nov. 6, increasing 45% from $36.52 for the year-earlier 12-month period. The S&P 500’s earnings have increased 8% to $114.82 over the past 12 months from $106.48 during the year-earlier 12-month period.
Investing in semiconductors
One way to invest in the entire PHLX Semiconductor Index is the iShares PHLX Semiconductor ETF SOXX, +0.66% It’s a reasonable way to play the sector broadly for the long term. For most investors, a long-term commitment will be best.
You can see in the first chart above that semiconductor stocks can go through periods of heightened volatility. Don’t get caught in the buy-high, sell-low trap. You must be committed for several years, possibly buying more shares during the inevitable market pullbacks, but certainly not selling into a panic.
There are other semiconductor ETFs out there, including some that are leveraged either long or short to the index. But the average investor is playing with fire with a leveraged or short ETF.
Comparing chip stocks
Here are the 30 companies that make up the PHXL Semiconductor Index, with their forward price-to-earnings ratios (based on consensus EPS estimates for the next 12 months among analysts polled by FactSet), change in sales per share and total returns:
|Company||Ticker||Forward P/E ratio||Forward P/E ratio – year ago||Change in sales per share – past 12 months from year-earlier 12-month period||Total return – 12 months through Nov. 6|
|Micron Technology Inc.||MU, -0.07%||5.8||13.6||48%||159%|
|Cirrus Logic Inc.||CRUS, -0.75%||11.8||12.7||24%||5%|
|Microsemi Corp.||MSCC, -0.42%||12.6||12.1||5%||18%|
|Qorvo Inc.||QRVO, +0.13%||12.9||9.6||8%||54%|
|ON Semiconductor Corp.||ON, +0.61%||13.2||10.3||52%||85%|
|Lam Research Corp.||LRCX, +0.53%||14.2||12.4||43%||121%|
|Intel Corp.||INTC, -1.56%||14.4||12.1||8%||43%|
|KLA-Tencor Corp.||KLAC, +0.04%||14.6||13.7||18%||45%|
|Cypress Semiconductor Corp.||CY, +1.43%||14.7||14.5||20%||74%|
|Skyworks Solutions Inc.||SWKS, -0.64%||14.7||12.0||14%||57%|
|Broadcom Ltd.||AVGO, -0.26%||15.2||12.7||29%||64%|
|Applied Materials Inc.||AMAT, +1.59%||15.5||12.5||46%||102%|
|Microchip Technology Inc.||MCHP, +0.83%||16.2||16.5||24%||61%|
|Marvell Technology Group Inc.||MRVL, +0.00%||16.6||19.3||-3%||64%|
|MKS Instruments Ltd.||MKSI, -0.05%||16.8||14.2||67%||123%|
|Taiwan Semiconductor Manufacturing Co.||TSM, +0.19%||17.8||14.1||N/A||44%|
|Qualcomm Inc.||QCOM, -0.05%||17.9||14.0||-5%||-3%|
|Analog Devices Inc.||ADI, -0.12%||18.7||19.2||25%||49%|
|Integrated Device Technology Inc.||IDTI, +0.33%||19.2||15.0||4%||47%|
|Teradyne Inc.||TER, +0.14%||19.3||15.1||22%||92%|
|Entegris Inc.||ENTG, +0.96%||20.6||16.0||15%||110%|
|Maxim Integrated Products Inc.||MXIM, -0.50%||21.2||19.1||6%||45%|
|Texas Instruments Inc.||TXN, -0.11%||21.9||20.1||12%||49%|
|Cavium Inc.||CAVM, +1.56%||22.1||21.1||71%||46%|
|Silicon Laboratories Inc.||SLAB, -0.71%||26.9||21.7||9%||60%|
|Xilinx Inc.||XLNX, +1.57%||27.3||21.5||7%||52%|
|ASML Holding N.V. ADR||ASML, +0.89%||29.2||23.4||33%||82%|
|Monolithic Power Systems Inc.||MPWR, +1.18%||35.1||28.2||16%||64%|
|Advanced Micro Devices Inc.||AMD, +0.35%||37.6||6,347.0||0%||82%|
|Nvidia Corp.||NVDA, +0.37%||53.6||35.2||41%||212%|
You can click on the tickers for more information, including news and earnings coverage, as well as estimates, charts and financials.
Because earnings results can be skewed in any quarter, and therefore any year, we showed the change in sales per share for the past 12 reported months through Nov. 6 from the year-earlier 12-month period. We looked at sales per share, rather than raw revenue, because the per-share numbers bake-in any dilution from the issuance of shares as well as the declines in share counts from buybacks.
Forward price-to-earnings ratios have declined for six of the companies, despite the increases in sales and strong stock performance for the semiconductor group.
As always, if you see any companies listed here that interest you, it’s important to do your own research, preferably with the help of your broker or investment adviser, to form your own opinion about the viability of its business over the next 10 to 20 years.