3 Semiconductor Stocks Bucking the Trend Amidst Market Volatility

·6 min read

The major indices are retesting the breakout from October as selling pressure has intensified in recent days. The Nasdaq, S&P 500 and Dow Jones Industrial Average have all touched down between 5-8% from their November peaks.

The VIX Index, commonly referred to as the ‘Fear Gauge’, has spiked more than 100% over the last month. The VIX generates a 30-day forward projection of volatility. It is derived from the prices of SPX index options and represents expectations for short-term price changes in the S&P 500.

In other words, the market is expecting price ranges to widen in the near-term, which is a common theme when stocks are falling. While not always the case, normally volatility is low or trending lower as stocks rise and typically trends higher as stocks fall. The old market adage speaks to this - stocks take the stairs up and the elevator down.

Over the past year, spikes in the VIX have represented solid opportunities to buy as volatility hasn’t remained elevated for too long. Looking at the 2021 return of the VanEck Vectors Semiconductor ETF SMH, you wouldn’t realize that volatility had spiked so drastically in the past month and that many stocks were in bear market territory:

Zacks Investment Research
Zacks Investment Research

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The VanEck Vectors Semiconductor ETF has doubled the Nasdaq’s performance this year with a return of 39%. SMH contains 25 of the top semiconductor holdings, including two of the three leaders we will discuss below. All three companies are part of the Zacks Semiconductor – Analog and Mixed industry group, which is ranked in the top 7% of all 254 industries. This industry group has outperformed this year with a return of over 34%. Historical studies have shown that about half of a stock’s future price appreciation is due to its industry grouping.

The relative outperformance of this industry group, particularly during a time of heightened volatility, is a clear sign that these stocks are in high demand. When emerging out of market corrections, normally the stocks that held up the best lead the leg back up.

While semis have advanced significantly this year, the ongoing supply constraint issues will continue into 2022. The three companies below likely still have room to run. Remember – leaders lead.

ON Semiconductor Corp. (ON)

On Semiconductor is a supplier of standard semiconductors and power management integrated circuits used in various devices such as high-speed fiber optic equipment and portable electronics. Headquartered in Phoenix, AZ, ON provides data flow management for precision computing and communications systems, as well as power management for distributing and monitoring the supply of power within electronic devices.

Sporting a Zacks #1 rank (Strong Buy), ON has exceeded earnings estimates in each of the last six quarters. The company most recently reported earnings of $0.87, a 17.6% surprise over estimates. Over the last four quarters, ON has produced an average earnings surprise of 18.5%, which has helped the stock climb 88% on the year.

ON Semiconductor Corporation Price, Consensus and EPS Surprise

ON Semiconductor Corporation Price, Consensus and EPS Surprise
ON Semiconductor Corporation Price, Consensus and EPS Surprise

Even with the hefty advance, the stock still trades relatively cheaply at a 22.07 P/E, far less than the industry’s average of 57.9. Analysts covering the firm have revised their full-year earnings outlook for ON to EPS of $2.8, a 12.5% increase from two months ago.

If the company delivers on expectations this quarter, annual EPS growth would reach an astounding 229.4% increase over 2020. ON is scheduled to report its quarterly earnings on February 7th, 2022.

MaxLinear, Inc. (MXL)

MaxLinear provides radio-frequency analog and mixed-signal solutions for broadband communication applications. Headquartered in Carlsbad, CA, MXL’s receiver products capture and process digital and analog broadband signals that are decoded for numerous applications.

MXL, also a Zacks #1 Strong Buy, has handily beat earnings estimates in each of the last three quarters. The company most recently reported EPS for the quarter ending in September of $0.75, a 10.3% surprise over consensus. In the past year, MXL has delivered a positive average surprise of 8.7%, supporting the stock’s ascent of more than 77% on the year.

MaxLinear, Inc Price, Consensus and EPS Surprise

MaxLinear, Inc Price, Consensus and EPS Surprise
MaxLinear, Inc Price, Consensus and EPS Surprise

MXL trades at a P/E multiple of 25.64, marking it relatively undervalued when compared to the industry average of 57.9. Analysts are in agreement regarding full-year earnings estimates and have revised them upward by 13.1% over the past 60 days. The current Zacks Consensus Estimate stands at $2.68, representing a 204.6% growth rate over 2020. MXL is due to report earnings on February 2nd, 2022.

Analog Devices, Inc. (ADI)

Analog Devices is a global leader in the design, manufacturing and marketing of high-performance analog, mixed-signal, and digital signal processing circuits used in most electronic equipment. Founded in 1965 and headquartered in Norwood, MA, ADI’s focus has been on key strategic markets where their signal processing technology plays an important role in their customers’ products.

With a Zacks #2 (Buy) ranking, ADI has exceeded earnings estimates in each of the last eight quarters, producing a healthy trend of earnings beats. The company boasts an average surprise of 6.1% over the past four quarters which has aided the stock’s 25.2% return this year.

Analog Devices, Inc. Price, Consensus and EPS Surprise

Analog Devices, Inc. Price, Consensus and EPS Surprise
Analog Devices, Inc. Price, Consensus and EPS Surprise

What the Zacks Model Reveals

Our proprietary model predicts an earnings beat for ADI for the current quarter. The Zacks ESP (Earnings Surprise Prediction) looks to find companies that have recently seen positive earnings estimate revision activity. The technique has proven to be useful for finding positive surprises. In fact, when combining a Zacks #3 rank or better with a positive ESP, stocks produced a positive surprise 70% of the time. ADI’s current ESP is +0.03%.

Like its counterparts, ADI trades a relatively attractive valuation (23.9 P/E) when compared to the industry group (57.9 P/E). Analysts have been steadily increasing earnings estimates for the year, advancing 4.3% over the past 30 days to arrive at a $7.54 EPS consensus. This would translate to a roughly 16.7% growth rate over last year. ADI is slated for its next earnings announcement on February 16th, 2022.


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