As a large swath of chip names reports quarterly results in a sector that may have run up too far for some investors, the high-flying semiconductor stocks may be poised for more losses in the coming weeks.
Including Applied Materials, Nvidia and Marvell Technology, investors will parse earnings from 40 percent of the components in the PHLX semiconductor index .SOX over the next month.
Powered by gains of nearly 60 percent in names such as Nvidia and Lam Research, the index is up more than 20 percent on the year. This has allowed the S&P technology sector .SPLRCT as the best performing of the 11 major S&P sectors as the index has been propelled. Hovering in the negative territory for the year are only five of the 30 names in the semiconductor index.
Expectations of strong earnings and revenue for the quarter fueled those gains. According to Thomson Reuters data, with year-over-year earnings growth of more than 40 percent, semiconductor and semiconductor equipment stocks are expected to see the highest growth within the tech sector.
"The semis are the heart and soul of the technology sector, particularly the large-cap technology sector, and they are really driving the theme that we saw really take shape in the second quarter," said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York.
"The question is are they going to be able to continue to do it and even if they are, which the street is expecting, there is a case to be made for stretched valuations triggering a little bit of rotation out of the space."
The trend that some investors are ready to lighten up is suggested by the initial stock movements in the wake of those that have already reported. For the semiconductor companies that reported earnings through Wednesday, the average 1-day stock performance has been a decline of 1.2 percent.
"A year ago I would say you have to be careful but now I’d say you have to be extremely careful," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
"The ones that have these exotic stories and high growth are probably frothy."
Above its five-year average of 14.4 but below the forward P/E of the broader S&P 500 of nearly 18, standing at 15.2 is the forward price-to-earnings (P/E) ratio of the S&P 500 semiconductor and semiconductor equipment index .SPLRCSE.
Suggesting that the sector may still have room to run higher, the 14-day relative strength index reading for the PHLX Semiconductor index stands at 51.6, below the 70 level that indicate an overbought condition.
"The expectations are high in terms of growth rates: you keep raising the bar, raising the bar; even if you hit the number or get a penny over, it’s not good enough anymore," said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, Georgia.
"You are getting some mismatched trading related to earnings reports coming out; it creates some opportunities to be in some great names where the fundamental themes are still in place."
(Source:www.reuters.com)
Including Applied Materials, Nvidia and Marvell Technology, investors will parse earnings from 40 percent of the components in the PHLX semiconductor index .SOX over the next month.
Powered by gains of nearly 60 percent in names such as Nvidia and Lam Research, the index is up more than 20 percent on the year. This has allowed the S&P technology sector .SPLRCT as the best performing of the 11 major S&P sectors as the index has been propelled. Hovering in the negative territory for the year are only five of the 30 names in the semiconductor index.
Expectations of strong earnings and revenue for the quarter fueled those gains. According to Thomson Reuters data, with year-over-year earnings growth of more than 40 percent, semiconductor and semiconductor equipment stocks are expected to see the highest growth within the tech sector.
"The semis are the heart and soul of the technology sector, particularly the large-cap technology sector, and they are really driving the theme that we saw really take shape in the second quarter," said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York.
"The question is are they going to be able to continue to do it and even if they are, which the street is expecting, there is a case to be made for stretched valuations triggering a little bit of rotation out of the space."
The trend that some investors are ready to lighten up is suggested by the initial stock movements in the wake of those that have already reported. For the semiconductor companies that reported earnings through Wednesday, the average 1-day stock performance has been a decline of 1.2 percent.
"A year ago I would say you have to be careful but now I’d say you have to be extremely careful," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
"The ones that have these exotic stories and high growth are probably frothy."
Above its five-year average of 14.4 but below the forward P/E of the broader S&P 500 of nearly 18, standing at 15.2 is the forward price-to-earnings (P/E) ratio of the S&P 500 semiconductor and semiconductor equipment index .SPLRCSE.
Suggesting that the sector may still have room to run higher, the 14-day relative strength index reading for the PHLX Semiconductor index stands at 51.6, below the 70 level that indicate an overbought condition.
"The expectations are high in terms of growth rates: you keep raising the bar, raising the bar; even if you hit the number or get a penny over, it’s not good enough anymore," said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, Georgia.
"You are getting some mismatched trading related to earnings reports coming out; it creates some opportunities to be in some great names where the fundamental themes are still in place."
(Source:www.reuters.com)