For the first time in years, the PHLX Semiconductor Sector index (SOX) underperformed the S&P 500 in the second quarter, by 4%. This came despite reasonably good fundamentals for the industry, which were offset to a large degree due to the trade tensions with China and the threat of tariffs and a trade war. The question for investors is what stocks are a good bet, as second-quarter results for many companies are imminent.
In a new research report from the Deutsche Bank semiconductor team, while they feel that most companies in the industry can offer good second-quarter numbers and forward guidance, they are cautious overall.
The report noted this:
While we expect generally solid second quarter results and third quarter guides, we believe the ongoing macro/geopolitical concerns are likely to cap investor optimism toward the semi sector and potentially compound pre-existing peak-cycle fears. Consequently, we reiterate our view that semi investors should take a somewhat conservative posture, focusing on names with defensive attributes such as self-help-driven margin expansion potential and discount valuations.
The analysts are positive on five companies, with varying market capitalizations, into earnings, and shares of all are rated Buy at Deutsche Bank.
Large Cap
Intel
This semiconductor leader is working hard to focus more on Internet of Things and data center cloud spending and away from PCs. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.
The company’s platforms are used in various computing applications, comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.
Intel announced the surprise resignation of the company’s chief executive officer recently while also pre-announcing second-quarter results, which came in above analysts’ expectations. Despite the good results, the startling resignation hit the stock and numerous top Wall Street analysts feel that investors should take advantage of the selling.
Intel investors are paid a solid 2.31% dividend. The Deutsche Bank price target for the shares is set at $64, and the Wall Street consensus price objective is $58.87. The shares traded early Thursday at $51.70. The stock is down almost 15% over the past month.
Mid Cap
Marvell Technology
Last year the company announced a bold $6 billion bid to buy Cavium. Marvell Technology Group Ltd. (NASDAQ: MRVL) is a fabless supplier of mixed-signal and analog semiconductor products to a number of storage, computing and communication applications, including hard disk drives, personal computers, servers, Ethernet switches, printers and connectivity markets.
Top analysts around Wall Street are very positive on the company’s purchase of Cavium, and many feel the deal adds significantly to the growth element for the stock. The addition also helps make Marvell solidly positioned in data center, cloud, enterprise, security and 5G.
The company has cleared the final hurdle to acquire Cavium, as it received the necessary approval from China’s State Administration for Market Regulation. The company expects to complete the merger this month, but the trade issues need to be watched.
Shareholders receive a 1.11% dividend. Deutsche Bank has a price target of $24, and the posted consensus price objective was last seen at $27.65. The stock traded at $21.55 Thursday morning.
Maxim Integrated Products
This company supplies some chips to Samsung for the red-hot Galaxy line. Maxim Integrated Products Inc. (NASDAQ: MXIM) designs, develops, manufactures and markets various linear and mixed-signal integrated circuits (ICs) worldwide. The company also provides a range of high-frequency process technologies and capabilities for use in custom designs. It primarily serves automotive, communications and data center, computing, consumer and industrial markets.
The Deutsche Bank team has favored Maxim for some time as the company continues to generate significant cash and targets 80% payout ratio. The company’s dividend yield is near its five-year average, and the company has grown its dividend in each of the past six years. The favorable view is based on expectations of continued strong growth in automotive with solid double-digit year-over-year growth and continued strength in its industrial segment.
Shareholders receive a solid 2.73% dividend. The $65 Deutsche Bank price objective compares to a $61.38 consensus target price. The stock traded at $61.75 a share.
Small Cap
Inphi
This small cap company is a strong contender in the data center arena. Inphi Corp. (NYSE: IPHI) provides high-speed analog and mixed signal semiconductor solutions for the communications, data center and computing markets worldwide.
Its end-to-end data transport platform delivers high signal integrity at leading-edge data speeds, addressing performance and bandwidth bottlenecks in networks, from fiber to memory. Inphi has solutions that minimize latency in computing environments and enable the roll-out of next-generation communications infrastructure.
The company announced in the spring that it is partnering with Innovium to provide customers multiple highly scalable industry-leading 100 G to 400 G data center solutions to meet their explosive bandwidth demand growth.
Deutsche Bank has set its price target at $37. The posted consensus target is $35.57, and the stock was trading at $32.60.
Monolithic Power Systems
This off-the-radar play could be offering continued upside potential. Monolithic Power Systems Inc. (NASDAQ: MPWR) designs, develops and markets integrated power semiconductor solutions and power delivery architectures for consumer, industrial, computing and storage, and communications market segments.
The company offers direct current (DC) to DC converter ICs used to convert and control voltages of various electronic systems, such as portable electronic devices, wireless LAN access points, computers, monitors, automobiles and medical equipment.
It also provides lighting control ICs for backlighting that are used in systems, which provide the light source for LCD panels in notebook computers, monitors, car navigation systems and televisions, as well as for general illumination applications. In addition, it offers alternating current (AC)/DC offline solutions for lighting illumination applications and AC/DC power conversion solutions for various end products that plug into a wall outlet.
Shareholders receive just a 0.9% dividend. The Deutsche Bank price objective is $150. The consensus target is $155.25, and the shares traded recently at $141.60 apiece.
Given the caution that Deutsche Bank has on the overall sector, it may make sense to put on partial positions here and see how investors respond to second-quarter reports. Given some of the current issues, it could be a “buy the rumor, sell the news” scenario.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
