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What are we looking for?

U.S. semiconductor stocks showing strong price momentum and value metrics.

Although U.S.-listed technology stocks have underperformed year-to-date, we have seen a rebound take shape, with the Technology Select Sector SPDR Fund ETF (XLK) gaining 15 per cent from the price low in mid-October. Digging into XLK holdings, semiconductors have seen the strongest bounce with the Dow Jones U.S. Semiconductors Index returning 22 per cent over the past month.

This week, I looked for stock opportunities inside the semiconductor sector – one of the best performing sectors of the past month despite having the worst performance year-to-date.

The screen

Using Trading Central Strategy Builder, we begin by setting a minimum threshold of US$10-billion in market capitalization. This will focus our search on large-cap U.S.-listed semiconductor stocks for greater stability, liquidity, and performance history.

To ensure we focus on firms with the best price momentum over the past month, we will constrain our search to companies with a four-week price performance greater than 10 per cent.

We added two metrics that may be of interest to investors looking for value. The stock’s price-to-earnings ratio must be less than the average of the Dow Jones U.S. Semiconductors Index, which sits at 19.5, in order to find semiconductor stocks with attractive valuations. Revenue growth must be 10 per cent or higher in the most recent quarter compared with the prior year.

Finally, we screened for the top ranked stocks using Trading Central’s Quantamental Rating, a proprietary methodology covering more than 50,000 stocks worldwide. It ranks stocks on a scale of one to 10, with 10 being the most bullish. It uses a combination of valuation, growth, quality, price momentum and Income as key metrics when ranking a company.

We have also included five-year annualized earnings-per-share growth, annual dividend yield, as well as 52-week and year-to-date price performance for your reference.

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What we found

U.S.-listed semiconductor companies

RANK COMPANYTICKERMKT. CAP. (US$ BIL.) 4W PERF. (%)P/EREV. GRTH. (%)TC QUANT. RATING5Y EPS GRTH. (%)DIV. YLD. (%)1Y PERF. (%)YTD PERF. (%)RECENT PRICE (US$)
1ON Semiconductor Corp.ON-Q30.415.718.325.97.939n/a12.60.269.72
2ASE Technology Holding Co.ASX-N12.928.25.825.27.5247.6-18.8-21.56.19
3KLA Corp.KLAC-Q52.536.216.730.76.8301.4-11.8-14.9367.70
4STMicroelectronics NVSTM-N34.418.810.335.27.1630.8-26.6-24.737.43
5United Microelectronics Corp.UMC-N18.221.17.841.57.7444.0-37.1-38.97.24
6Texas Instruments Inc.TXN-Q157.413.618.212.96.6192.9-8.5-9.0172.69
7NXP Semiconductors NVNXPI-Q43.218.116.720.47.2642.0-23.4-27.8164.66
8Lam Research Corp.LRCX-Q62.138.013.117.96.5291.5-27.8-37.2449.88
9Taiwan Semiconductor Manu.TSM-N405.924.814.547.96.3122.3-33.3-38.379.77
10Skyworks Solutions Inc.SWKS-Q14.813.111.810.46.2122.7-43.3-42.291.69

Source: Trading Central

Our screen turned up 27 stocks; the top 10 are shown in the accompanying table.

Topping our list is ON Semiconductor Corp., which provides power and signal management devices for a broad range of industries. Despite dismal performance in the semiconductor sector this year, ON Semiconductor is within 10 per cent of its all-time high. The stock has the highest TC Quant rank on our list at 7.9 out of 10. It is also the only stock on our list with a positive price return year-to-date.

Lam Research Corp., a supplier of wafer fabrication equipment and services to the semiconductor industry, has the highest four-week price return on our list at an impressive 38 per cent after bouncing off its price low of US$300 on Oct. 13.

Chipmaking giant Taiwan Semiconductor Manufacturing Co. has the highest market cap on our list at almost US$406-billion, a P/E of 14.5 and the highest revenue growth at 47.9 per cent. The stock has attracted value investor Warren Buffett, whose Berkshire Hathaway Inc. this week disclosed in a regulatory filing it had purchased more than US$4.1-billion of TSM stock.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.