Deutsche Bank Extremely Cautious on Semiconductors: 5 Top 2019 Picks

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For many tech investors, the ride on the semiconductor train from 2014 to the peak in March of 2018 was incredible. Massive nonstop gains driven by countless smartphone cycles, huge data center build-outs, industrial and auto use, and constant demand from the video gaming arena drove prices higher for years. While the PHLX Semiconductor Sector (SOX) index has backed up dramatically since last October, the group is still rich from a valuation standpoint.

A new Deutsche Bank research report casts a very wary eye toward the industry, and while the analyst feels that the long-term secular view remains positive, the near term is another story. The report said this in an overview of semiconductors in front of upcoming fourth-quarter earnings:

Heading into the fourth quarter earnings season, we remain cautious on the semi sector. While the second half 2018 pullback in the SOX was a directionally encouraging step toward reflecting the current slowdown, we believe it was of insufficient magnitude on both an absolute (~-15% from recent peak) and relative (~-6%) basis to capture a full cyclical correction (~-25%/-15% in prior downturn).

The firm basically is saying that stocks are still overbought and multiples are still too high. However, it does remain positive on the companies that have exposure to data centers, autos and the potential 5G build-out and applications.

These five top stocks are rated Buy in the report, and all make sense for aggressive accounts looking to add chip stocks.

Intel

This semiconductor leader is working hard to focus more on Internet of Things and data center cloud spending, and it is the top mega-cap pick at Deutsche Bank. 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.

Last year Intel announced the surprise resignation of the company’s chief executive, and recent media reports suggest the company could select new CEO soon, which could provide clarity and a positive stock catalyst. Typically the company picks the CEO from among insiders, but investors likely will welcome the outside perspective needed for tough portfolio decisions.

Intel investors receive a 2.48% dividend. The Deutsche Bank price target for the stock is $58, and the Wall Street consensus target is $54.58. The shares closed Thursday’s trading at $48.47.

Broadcom

This stock has been absolutely crushed and is the top large-cap pick at Deutsche Bank. Broadcom Inc. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.

After being one of the best-performing stocks over the prior three years, Broadcom declined by 22% peak-to-trough in 2018, as its blocked bid for Qualcomm and recent acquisition of CA Technologies caused some uncertainty about the company’s strategic direction.

With all that noted, most Wall Street analysts like the CA acquisition and believe the software capability will give the company the opportunity to sell chips and software directly to Fortune 500 companies, and position them as more strategic suppliers.

Broadcom investors receive a 4.15% dividend. Deutsche Bank has a $300 price target, while the consensus target is $291.41. Shares closed at $255.33 on Thursday.