We have noted recently here at 24/7 Wall St. the incredible outperformance of the PHLX Semiconductor Sector (SOX) index, which tracks the semiconductors. It is up an astonishing 35% so far this year, versus the 16% gain in the S&P 500, and just in April, up 9% versus the 1% rise in the venerable index. Given the huge move, many on Wall Street are nervous ahead of earnings as the group’s run comes in spite of street expectations that companies deliver a third and possibly final round of below-consensus guidance.

The semiconductor team at SunTrust Robinson Humphrey is one on Wall Street that feels that indeed this may be the final quarter of guidance that comes in below expectations, and while they are pumping the brakes like many, they do have three top companies that they like going into the first-quarter earnings reports. All three are rated Buy.

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Analog Devices

This stock could very well continue to benefit from an increase in information technology and upcoming 5G spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

In 2017, the company introduced a highly integrated polyphase analog front end with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

The SunTrust team said this in its report:

Despite the company having performed about inline with the SOX year-to-date, and valuation doesn’t look remarkably cheap, we still believe the stock is set up well into first quarter earnings because (a) consensus models below-seasonal growth for the remainder of 2019, (b) Analog Devices has among the best end market exposure (high communications & aerospace/defense exposure) with a powerful 5G content growth story, and (c) Linear Technology and Hittite Microwave revenue & cost synergies are still coming.

Analog Devices investors are paid a 2.05% dividend. The SunTrust price target for the stock is $126, and the Wall Street consensus target is lower at $114.53. The stock closed trading most recently at $114.79 per share.

Microchip Technology

Shares of this huge Internet of Things benefactor and have been very strong recently. Microchip Technology Inc. (NASDAQ: MCHP) is a leading provider of microcontroller, mixed-signal, analog and flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide.

The company received a receipt of antitrust clearance in the United States for the acquisition of Microsemi and the deal closed in June of 2018. Most on Wall Street feel it is an outstanding addition but may take some time to fully integrate.

The SunTrust team stays very positive on the stock and noted this:

Despite having already delivered 4% above-SOX returns year-to-date, we believe the stock is set up well into Q1 earnings because (a) consensus models below-seasonal growth for the remainder of 2019, (b) the company has better than average end market exposure (aerospace/defense & communications, and no handsets), (c) MSCC synergies are still coming, and (d) valuation isn’t stretched.

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Microchip Technology investors are paid a 1.76% dividend. SunTrust has a price target for the shares of $112, and the consensus price objective was last seen at $99.81. The shares closed most recently at $98.71 apiece.

NXP Semiconductors

This is still considered a top play for investors looking for a chip stock with Internet of Things exposure. NXP Semiconductors N.V. (NASDAQ: NXPI) became the fourth largest semiconductor company in the industry after it merged with Freescale in late 2015. It is also important to note that the combined company is the number one supplier in auto semiconductors with a 14% share, as well as the number one supplier in global microcontrollers and a dominant supplier in mobile payments.

NXP continues getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile-phone charging, increased cellular data consumption and LED lighting. Trading at a solid discount to peers, some Wall Street analysts are very positive on the faster earnings growth potential relative to its competition.

The SunTrust analysts pointed this out in the recent report:

While NXP’s valuation looks attractive relative to its historical offset vs. the S&P, other factors make the stock appear less attractive: NXP has outperformed the SOX by 4% year-to-date, consensus embeds a modest recovery in 2019 already, and end markets are skewed less favorable with high autos exposure. Despite this, we view the stock as relatively better setup than the superficial review suggests, mainly because we believe the content growth story in automotive (RADAR ADAS, V2X ADAS, BMS, and domain controllers) will help establish a more constructive outlook.

The SunTrust price target for the stock is set at $127.50. The posted consensus target is much lower at $103.16, and the stock ended last week trading at $100.59.

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These three top chip stocks have been on fire. Given the fact that share prices are elevated due to the big first-quarter run, and earnings are on-deck, it may make sense to buy smaller positions now and wait for the results. Any large earnings miss or poor forward guidance could result in some serious selling, and while the SunTrust analysts like all three into earnings, surprises can happen.

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