The current environment is an uncertain one, but investors are doing their best to sort through the ashes and attempt to differentiate value from value traps. There were a number of upgrades on Friday that led to some nice moves that were mostly faded. While not all the gains held, it was the to some degree the thought that counts. The fact there is some willingness to step into the abyss and recommend a company indicates some sense that prices may stabilize, at least for a short period of time.
Technology stocks have been market leaders for so long and even during the recent sell-off the Nasdaq 100 (NDX) has outperformed the S&P 500 (SPX). As traders begin to eye an oversold rally, it makes sense that they would go back to what has worked so well. Among technology, it’s typically semiconductors that often lead the sector. As manufacturing of electronics was shut down amidst the peak of coronavirus infections, these stocks began to languish. As factories have been opening and production resuming, it’s likely that the bullish movement in semiconductors on Friday may be a bullish indication for tech going into the next week or two.
Semiconductor Stock #1: Advanced Micro Devices, Inc (AMD)
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In the last month, AMD has been down over 40% at one point before recovering slightly at the end of last week. Despite the large decline, analysts have held their earnings expectations for the current quarter and year. Earnings growth for 2020 is 80% and 38.6% in 2021.
As the price falls, a company’s valuation improves, especially if expected earnings hold as they have. For AMD, its price/book value ratio and price/sales ratio are the lowest in over a year. The price/forward earnings are the lowest since 2018 and nearly half that of its 5-year average.
The stock finished the week higher than Monday’s close, which is quite an accomplishment these days and the volume has largely been above average all week the price tries to hammer out a bottom. A close above $230 would provide an indication of a larger potential move to a $265 price target.
Semiconductor Stock #2: Lam Research Corp (LRCX)
LRCX moved significantly higher early in the session before coming back to earth. The company was upgraded by Mizuho analyst Vijay Rakesh from a neutral to a buy rating. Comments from the analyst indicate that the company is “well positioned” to rebound in the second half of 2020 into 2021. So far this month, shares have been down as much as 44% and closed near that level on Friday.
From a valuation standpoint, their P/E and Price/forward earnings as well below the 5-year average and other valuation ratios are trading near the 5-year average. As analysts continue to maintain their EPS growth projections of 10.30% and 26.7% for 2020 and 2021, this present an opportunity to own a good company at a below average price.
A close above $216 would indicate the potential for a near-term rally to test $260. That is close to a 20% move in a relatively short timeframe.
Semiconductor Stock #3: NVIDIA Corporation (NVDA)
In the Internet of Things (IoT) age where everything is connected to internet and has some processing capability, semiconductor stocks have huge potential. However, given the fact that the effects of COVID-19 will likely remain after the pandemic ends, it’s important to consider what “things” will maintain relatively higher demand. In technology, you have consumer technology and enterprise. In an economic downturn, it’s the consumer that is the most cyclical and the enterprise side that is generally more stable. NVDA has a strong enterprise presence that may help insulate it from a slump in consumer durable spending.
Like it’s peers, NVDA has also traded over 40% lower for the past month. Following a strong upgrade following its last earnings, it has been able to hold on to those upgraded estimates throughout the correction. Also, despite the correction, valuations have only come more in alignment with its 5-year average.
A close above $220 would indicate a potential move to $265 in the near term.