October 1, 2019

There is widespread consensus that interest rates and bond yields are going to remain low for a long time, maybe several years, as inflationary pressures are generally absent in the market for most goods and services, save for healthcare and real estate. Market volatility has returned with a vengeance as the U.S. stock market contends with new circumstances surrounding the impeachment inquiry, White House threats to limit investment in China’s economy, and even delisting Chinese securities on U.S. exchanges.

Uncertainty seemed so great last Friday that sellers targeted one sub-sector of the broader IT sector that had been displaying excellent relative strength against the highly nervous tape. The semiconductor space has shown excellent leadership among all other tech sub-sectors for most of 2019, right up until late last week, when the rolling correction within the software, networking, social media, fintech, and e-retail stocks finally exacted some sharp pain in the chip and chip equipment stocks.

The semiconductor sector as a whole can be divided into three groups: chip manufacturers, fabless chip companies, and chip-equipment makers. Semiconductors run communications networks, computers, cell phones data centers and the Internet, and such massive emerging trends as cloud computing, 5G wireless networks, big data, the Internet of Things, autonomous driving, smart homes, and artificial intelligence.

As an industry, semis are highly cyclical and tend to be a leading economic indicator. Most industry analysts agree that the sector bottomed during the second and third quarters with demand set to rebound in the fourth quarter of 2019 and first quarter of 2020, hence the sharp rally in most of the leading names following the steep market sell-off in May. In fact, the chip sector traded to a new all-time high in July followed by a pullback in the weak month of August that led to another sharp rally after Labor Day.

The selling of the chip sector last week was, in my view, a sign of the beginning of the end of the current tech correction that has hammered the high-beta Software as a Service (SaaS) cloud stocks the hardest. A view of the one-year chart of the VanEck Vectors Semiconductor ETF (SMH) shows a very constructive back-and-filling process where shares of SMH filled the breakout gap of early September.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

SMH represents the biggest and most widely-held names in the sector and now sits right on its 50-day moving average – a heathy technical situation. Assuming my view – that the current pullback is a short-term event before the sector trades to new highs – it would behoove investors looking for high-tech, high-growth yield to consider some of the leading stocks in the semiconductor sector for yield and growth.

Attractive and Growing Dividends in the Chip Sector

Shares of Broadcom Inc. (AVGO) have recently retreated from $302 to $274 while paying a dividend yield of 3.8%. Qualcomm Inc. (QCOM) has come in from $90 to $76 and pays out a dividend yield of 3.2%. Storage Technology (STX) corrected from $58 to $53 and pays out a juicy 4.7% yield, while Taiwan Semiconductor (TSM) trades within a point of its high and still pays out a yield of 3.5%.

Navellier & Associates owns AVGO but does not own QCOM, STX, or TSM in managed accounts and our or sub-advised mutual fund. Bryan Perry does not own AVGO, QCOM, STX, or TSM in personal accounts.

Summer chip sales have been flat. John Neuffer, president and CEO of the Semiconductor Industry Association (SIA) said, “While global semiconductor sales in July were once again down on a year-to-year basis, month-to-month sales were up slightly… with Asia Pacific and the Americas posting the largest gains.” Even so, the assault on the semi sector felt like “they finally went after the good stuff.”

If in fact the semiconductor cycle is set to rebound sometime during the next year, these companies (and many others) will see earnings rise sharply, leading to a raising of their dividends to reward shareholders.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The recent softness in global semiconductor sales is being attributed to the China trade war debacle, slowing global smartphone growth, a decline in global PC and laptop shipments, the collapse in crypto mining, and some slowing in growth from the booming data center buildout. Again, with the next set of transformational technologies all set to explode over the next five years, I believe that using this current volatility in the chip sector represents a big opportunity to add yield and growth to portfolios.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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