Pacific Crest: How To Pick Semiconductor Winners

A new report by Pacific Crest analyst Michael McConnell focused on semiconductor stocks. Recent data from the space emphasize the importance of stock selection, and McConnell explained exactly what investors should look for and which names the firm likes best.

Lowered Expectations

Semiconductor stocks have had a rough go of it recently. In the past three months, the Market Vectors Semiconductor ETF (NYSE: SMH) has fallen 17.3 percent.

In his report, McConnell outlined the causes of the recent weakness. Following a relatively weak earnings season, expectations for the next few quarters have been dialed back. According to the report, 80 percent of semiconductor companies issued guidance below consensus estimates. The uncertain demand environment in China is likely a key driver of the weak guidance.

Related Link: Citi: Buy Semiconductors After 20% Selloff

Inventory Levels Elevated

In addition to weak earnings and guidance, the latest inventory numbers from many semiconductor names are somewhat discouraging. McConnell pointed out that total supply chain days of inventory (DOI) are approaching all-time highs of 67, while end-customer DIO is at its highest level since 2002. These elevated inventory levels will continue to weigh on growth in the space throughout the rest of the year.

Bullish Outlook

Despite the bad news, McConnell believes that recent price weakness has created opportunities for long-term investors. “We believe semiconductor stocks with high dividend yields and ongoing cost-reduction initiatives should relatively outperform given decade-high customer and industry levels and an uncertain global macroeconomic demand environment,” he explained.

Pacific Crest’s top picks include the following:

• Maxim Integrated Products Inc. (NASDAQ: MXIM)
• Cypress Semiconductor Corporation (NASDAQ: CY)
• Applied Materials, Inc. (NASDAQ: AMAT)
• KLA-Tencor Corp (NASDAQ: KLAC)

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