Chip stocks have been bouncing back, but are the trends sustainable?
The benchmark PHLX Index (SOX) started at 3,485 this week, up 1.56% and up about 2% over the previous 7 days and following on a strong rebound from lows earlier this month.
“From March 14 through March 22, the index gained 13.3%,” Ponsi said. “That’s an impressive feat, considering it occurred in just six trading days.”
That performance seemed to contradict the charts, as the technical charts on the semiconductor industry have been mixed. Despite the rally in the SOX, the index remained below its key moving 50-day and 200-day moving averages.
That changed on Thursday, March 24, when the SOX roared higher by 4% to close at a one-month high. “After a scare in February that saw the semis trade at their lowest level in 10 months, Thursday may signal a turning point for the SOX,” Ponsi noted.
Additionally, big news out of the semiconductor sector recently comes from arch-rivals Nvidia and Intel, who are linking up to manufacture more chips together in the midst of a major semiconductor shortage.
“Makers of semiconductors or chip manufacturers have been grappling with the impact of global supply chain shortages that have led to a dearth of chips that are used in everything from cars to home appliances for nearly two years,” reported TheStreet’s Vidhi Choudhary.
The looming crisis first started even before the pandemic when Washington put sanctions on China’s biggest telecoms equipment maker, Huawei Technologies, amid spying allegations. The Chinese company has constantly denied the claims.
Additionally, during the pandemic, factory closures further hurt this sector, because demand for chips continued to rise for both remote work and entertainment.
“Everyone from automakers like Ford (F) – Get Ford Motor Company Report and General Motors (GM) – Get General Motors Company Report, one of the hardest-hit sectors due to these chip shortages to tech companies like Apple (AAPL) – Get Apple Inc. Report, which has started producing its own chips, to semiconductor giants; are trying to find ways around this conundrum,” Choudhary reported.
Now, Nvidia (NVDA) – Get NVIDIA Corporation Report the largest chip company in America by market value is open to exploring a deal with rival chipmaker Intel (INTC) – Get Intel Corporation Report as it seeks to expand and diversify its supply base.
Nvidia’s ambitions appear to be to replicate the success that Asia’s chip foundry giant Taiwan Semiconductor Manufacturing Co (TSMC) enjoys.
“They’re interested in us using their foundries. We’re very interested in exploring it, and being a foundry at the caliber of a TSMC” said Nvidia Chief Executive Jensen Huang during a recent company event.
“I’m encouraged by the work that is done at Intel. I think that this is a direction they have to go and we’re interested in looking at the process technology,” Huang said.
Huang added that discussions with Intel could take a while to conclude and added that its partnerships with TSMC and South Korean tech giant Samsung in particular took years to cultivate, Choudhary reported.
Here’s a look at some of the chip sector newsmakers this week, from an investment point of view.
Skyworks Solutions SWKS $136.92. 5-day performance 1.29%.
Skyworks (SWKS) – Get Skyworks Solutions, Inc. Report has been looking up since Real Money’s Bruce Kamich last review of the stock in November, 2021.
“In our updated daily bar chart of SWKS, we can see that the shares have rallied to the underside of the declining 50-day moving average line,” Kamich said. “The 200-day moving average line is also in a decline but intersects well above the market around $163.”
Additionally, the stock’s On-Balance-Volume (OBV) line declined from early July to early February and has since steadied. The Moving Average Convergence Divergence (MACD) oscillator has been bearish since August but has now improved and could head up to the zero line.
“Prices are well below the declining 40-week moving average line but the weekly OBV line has stabilized or bottomed,” Kamich noted. “We can see a potential upside price target of $175.”
Kamich’s bottom-line strategy? Aggressive traders could go long SWKS on a one-day dip, risking to $125.
“Look for a rebound into the $150-$160 area to take profits,” he said.
Nvidia NVDA $274.20. 5-day performance 3.65%.
Kamich also reviewed Nvidia, where share prices have broken their downtrend from late November.
Prices are back above the rising 200-day moving average line but is this just a bounce or the start of a sustained move higher?
“In our Jan. 24 review of NVDA we concluded: ‘Continue to avoid the long side of NVDA. The decline in this stock is not over. Do not try to catch a falling knife,’” Kamich wrote. “NVDA retested the January low in February and earlier this month and held. Yet traders have to wonder about the upside the path of least resistance now.”
Looking at the daily bar charts, Kamich sees Nvidia shares trading above the declining 50-day moving average line. “The trading volume has been very active since early November,” he said. “The daily On-Balance-Volume (OBV) line has been steady since its late January low.”
Additionally, the Moving Average Convergence Divergence (MACD) oscillator has been improving since late January and is just below the zero line and a potential buy signal.
NVDA charts also show few lower shadows below $220, which tells buyers that some traders have been rejecting the lows.
Right now, Kamich sees an “impressive upside price target” of $359-to-$367.
“But a trade at $272 or higher is needed to convince me,” he said.
Overall, NVDA has transitioned from a downtrend to a sideways trend the past several weeks.
“Strength above the February highs is needed to turn things more bullish,” Kamich said. “I would treat this as a trading affair until the daily OBV line moves above its November zenith.”
Broadcom AVGO $623.40. 5-day performance 2.13%.
Investors may have bumped into Goldman Sachs’ Volatility Hedge List a time or two.
Goldman likes companies with defensive financial returns and financial flexibility amid the market’s turmoil this year. Some stocks with those characteristics may find their names on that list.
“Against the current macro backdrop/market volatility, we focus on two characteristics to identify companies that should be favorably positioned across market environments,” Goldman analysts, led by Deep Mehta, wrote in a report.
The two factors include defensive financial returns and financial flexibility. Goldman analysts rate any stock on its list as a “buy”.
“Goldman defines defensive returns as ones with cash return on cash invested in excess of a company’s weighted-average cost of capital,” TheStreet’s Dan Weil noted. “And Goldman defines financial flexibility as a strong conversion of earnings into free cash flow (FCF), or earnings quality.”
That brings us to semiconductor titan Broadcom (AVGO) – Get Broadcom Inc. Report, which made the latest list.
What’s the buying rationale? Goldman has a take on that.
Broadcom has a “strong competitive position across many semiconductor franchises, resilient gross margin profile and healthy free cash flow generation,” company analysts stated in the report.
The company’s stock price has risen by 6.17% over the past 30 days, but it’s down 6.27% on a year-to-date basis.
