Equity markets have suffered a full recession this year, and the bulls are still struggling to find footing. They have had strong days, but not in sequence long enough to make a difference. Therefore the algo behavior has been consistently selling rallies. As a result, the Nasdaq has now corrected 31% off of its highs. Today we will discuss three opportunities that have come to life among the chip stocks posse. They make a good bit of the Nasdaq index, so there are bargains among them.
But first we have to acknowledge the risk from the macroeconomic conditions. Even though the correction has been harsh so far, there’s still plenty of potential downside to go. The Nasdaq, for example, is still 19% above the 2020 January highs. Those highs quickly vanished. This is to say that some bargains may actually still be bull traps. Therefore careful consideration is necessary to find the real ones.
There are many segments among the chip stocks, and I varied my choices among them. Narrowing the list down to a worthy few is a tough task, so I know I wasn’t perfect. There are other companies that deserve to be on here that I omitted. The logic I used would allow you to expand the list to include your favorite chip stocks.
I’m focusing first on quality, because I want to eliminate all intrinsic questions. This keeps me from having to focus on external risks. Second, I’m looking for stocks that have fallen far enough to have technical support readily available.
For example, Nvidia (NASDAQ:NVDA) is an outstanding leader in the segment. But its stock is still 50% above the pandemic breakout. Although there is support below, I fear the bearish altitude that is still available back to the 2020 levels. This is a little bit better for Advanced Micro Devices (NASDAQ:AMD); nevertheless it is still still too high for me to feel comfortable with it.
|SMH||VanEck Semiconductor ETF||$207.19|
Among major chip stocks, Intel (NASDAQ:INTC) is the cheapest. Its stock is also the only one deep inside support zones below 2020 levels. It may not be the sexiest headliner, but it’s a critical player.
INTC stock has already shed all of its Covid-19 rally weight and is bouncing off of support from 2015. In fact, those levels were also important at the tail end of the dot-com bubble burst. These are signs that the easy work for the bears is complete. To take it significantly further south from here will take a lot more hard work.
There is tremendous value inside the company, and it is tangible. The financial metrics of Intel stock are beyond reproach. While it is not excitingly explosive, the dollars it produces are huge. The only knock against it is that perception that it’s boring and lagging.
I don’t believe that perception is everything, so this will eventually change. I have recently purchased two AMD computers, and I already plan on going back to Intel for my next. My perception of AMD’s supremacy was wrong.
If stocks markets are building a bottom, then Intel stock is worth holding a starter position.
The underlying thesis behind investing in chip stocks is that the world is going digital. This is a trend that started decades ago, but it has accelerated exponentially in the last three years. The urgency to go online has created a wave to sustain businesses like Micron (NASDAQ:MU). Mu stock has been a star before, but has failed to crack into the three digits. The trend is proper enough to forecast more upside in the long term.
Its last attempt at $100 per share ended this year $1.55 short. Since then, MU stock has lost 44% of its value. It is now at a place of balance near January 2020 levels. These are lines that were in play two years prior. Such pivotal zones usually provide support for stocks on the way down.
Support does not always translate into an absolute floor, so we should consider the potential for lower prices. When the micro-economic conditions are this iffy, taking partial positions at first makes total sense. The fundamental metrics for Micron are impressive enough to eliminate risks of management flubs. I would like to see more improvement in net income since growth is tepid.
Nevertheless, last year the company generated $12.5 billion in cash from continuing operations. That’s pretty close to the peak of 2018. In other words, management is doing a better job in tougher conditions. Those are votes of confidence in my book. For this reason, MU deserves to be among the chip stocks to buy on this dip.
VanEck Semiconductor ETF (SMH)
Another pick could have easily been Texas Instruments (NASDAQ:TXN) or Qualcomm (NASDAQ:QCOM). But instead I will make it a blanket bet on the sector. This approach diffuses the risk inherent in any single stock. So my last pick today is the VanEck Semiconductor ETF (NASDAQ:SMH).
This one encompasses two of our picks today and the rest of the greats. Each has varying degrees of influence on SMH, and they collectively trade together. My only concern here is that SMH stock is still about 10% above its 2020 breakout levels. So for that reason I would consider this my least favorite of the three today.
Since it’s an ETF, it inherits its fundamental metrics from its components. And there are very few stocks within it that have questionable futures. My confidence in the quality of these chip stocks within it is high. But since it is not absolute, I would leave room for error. Going all in here would be a bit of an exaggeration of my endorsement.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.