Needless to say, shell-shocked investors are trying to sort out what effect a protracted trade battle with China will have on stocks, especially in the technology arena, and specifically with semiconductors. Some on Wall Street feel there could be a reasonably fast settlement to the divide between the two superpowers, while others feel that both President Trump and China President Xi will dig in their respective heels, not wanting to appear to be weak.
One thing is for sure, despite the rhetoric and disruption, life for better or for worse will go on, and so will the need for semiconductors. SunTrust semiconductor analyst William Stein and his team have taken a measured and practical approach to the current situation. While hardly pounding the table, they remain realistic and note this:
As trade frictions increase, geographic specialization advantages erode and companies adjust supply chains. When trade frictions began in earnest in late 2018, buyers either switched suppliers, adjusted supply chains, absorbed costs, or canceled projects. As frictions increase in 2019, it’s a similar story. In some cases the initial tariff may make the incremental tariff uneventful, but in other cases the incremental tariff may trigger project cancellations. The net effect will almost certainly be lower estimates for semis.
After noting the risks, they also point out some positives of looking past the current trade concerns:
As we’ve seen in the several months, some investors will take an optimistic stance, look through near-term volatility, triggering powerful recoveries. In recent trading the semi stocks bottomed earlier than they usually do (two quarters prior to fundamentals bottoming, vs. only 1 quarter typically), rallied quickly (peaked in 4 months) and rose 48% (vs. a typical recovery of only 22% in a 4-month period). To us, this was caused by investors’ expecting Trump to set a business-friendly policy, enabling courage to look through any near-term downcycle. We can’t predict this with certainty but it becomes our default expectation looking more than 1-2 quarters out. So, remain flexible. We could tell investors to buy stocks least hurt by trade barriers and sell stocks most hurt by them. Unfortunately, this approach seems to be a recipe to get whipsawed. Instead, we continue to focus our long ideas on stocks with company-specific benefits under-appreciated by investors.
These three top stocks are Buy rated, and the companies have strong franchises that should remain positive for years to come.
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 report said this:
Like its peers, the biggest swing factor in the company demand remains the trade negotiations between the U.S. & China. Unlike its peers, Analog Devices fundamentals are benefiting from investments in the communications end market and mergers and acquisitions. Buy for better fundamentals and an ongoing re-rating more aligned with high-performance analog peers.
Analog Devices investors receive a 2.02% dividend. The SunTrust price target for the shares is $126, and the Wall Street consensus target is $117.61. The stock closed Tuesday’s trading at $106.75 a share.
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