Anyone who has been long the semiconductor sector over the last two years has been a big winner. The explosion in Internet of Things applications, combined with huge industrial and automotive adoption and use, has been incredible. Like all good runs in the market, however, this one could be slowing down, and chasing some of the super high-flyers could prove to be costly if they slip on earnings or guidance.
A new research report from Deutsche Bank is cautious on semiconductors, hence the firm’s overall neutral rating on the sector. In fact, the report notes that while the SOX index, which tracks the sector, was up in the second quarter, basically in line with the S&P 500, it failed to outperform the broader market on a quarterly basis for the first time in a year. According to the report:
While we expect solid fundamentals to continue in the second and third quarter with in-line to slightly better reports/guides, we see year-over-year growth metrics peaking and view the relatively in-line performance in the second quarter as an illustration of the lack of further valuation expansion that typically precedes valuation compression when cyclical peak concerns rise.
The analysts do stay positive on the firms five top stocks to buy:
This company has been on fire over the last year and remains a top pick across Wall Street. Broadcom Limited (NASDAQ: AVGO) has an extensive semiconductor product portfolio which addresses applications within the wired infrastructure, wireless communications, enterprise storage, and industrial end markets. Applications for Broadcom’s products in these end markets include: data center networking, home connectivity, broadband access, telecommunications equipment, smartphones, base stations, servers, storage, factory automation, power generation, alternative energy systems, and displays.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.
The analysts note that the stock is under-owned compared to peers, and the 40% iPhone content growth, combined with the closure of the Brocade purchase, which they feel is accretive, are very positive catalysts. They also feel dividend growth is possible.
Broadcom Limited investors are paid a 1.65% dividend. Deutsche Bank has a $275 price target. The Wall Street consensus price target is set higher at $273.81. Shares closed Tuesday at $250.88.
This leader in semiconductors is working hard to scale away from dependence on personal computers. Intel Corp. (NASDAQ: INTC) designs, manufactures, and sells integrated digital technology platforms worldwide. It operates through Client Computing Group, Data Center Group, Internet of Things Group, Software and Services, and All Other segments. The company’s platforms are used in various computing applications comprising notebooks, 2 in 1 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.
Earlier this year the company announced the purchase of Mobileye NV (NYSE: MBLY) for $15.3 billion. The Israel sensor company gives the chip giant a leg up in the autonomous car competition, and also adds many other capabilities. While some say the valuation paid is high, the dividends down the road could be worth the price.
The analysts note that while the stock is a more controversial pick, it benefits from the recent Purley server launch, and the fact that Intel should be able to re-accelerate data center growth. Investors need to focus on going forward in 2017 and beyond.
Intel investors are paid a very nice 3.16% dividend. The Deutsche Bank price objective is posted at $43, while the consensus is at $39.56. The stock closed trading on Tuesday at $34.53.
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