The semiconductor industry has been one of the top performing industries over the past six months. The VanEck Vectors Semiconductor ETF (NYSE: SMH) has gained 24.64 percent from April 20 through October 20. The S&P 500 has gained 9.31 percent during that same time period. That means the SMH has gained 2.5 times what the overall market has in only six months.
Given how the sector has performed over the past six months, you would think that the sentiment toward the sector is rather bullish ahead of an important stretch for earnings reports from the industry. But that isn’t really the case. Over the next ten days, six chip companies will report earnings, but only two of the six have high sentiment readings at this time.
Of the companies reporting over the next week and a half, two really stand out for their fundamental performance. I used the Investor’s Business Daily EPS rank and SMR rank to get a quick snapshot of the fundamentals of each company. The EPS rank scores the company according to its earnings growth and the scores range from 1-99. The SMR grade is based on the company’s sales growth, profit margin and return on equity with grades ranging from “A” to “E”, with A being the best. Using this as the foundation, Texas Instruments (NYSE: TXN) and Intel (Nasdaq: INTC) grade out better than the other four.
Texas Instruments has an EPS rank of 96 and an SMR grade of an A. Looking at the other columns in the table we see analysts’ forecasts for the earnings this quarter have remained constant over the last 30 days. We also see the Sentimentrader.com Optix ranking is rather high at this time which suggests extreme bullish sentiment heading in to the report. While the technical performance and fundamental performance have been well above average, the high sentiment suggests that a little bit of caution may be warranted.
Intel shows an EPS rank of 88 and it also scores an A in the SMR rank. Analysts have also remained comfortable with the forecast as the estimate for earnings of $0.80 per share has remained for the last month. Intel also shows a little bit higher sentiment reading than usual, but not as high as Texas Instruments. With bullish sentiment so high, it is difficult to impress investors enough to see a big gain. While I wouldn’t necessarily suggest shorting either company, I also wouldn’t bet on a big breakout to the upside.
The other four companies have a mix of above-average, average and below-average fundamental rankings. We see that Advanced Micro Devices (Nasdaq: AMD) has an EPS rank of 66, slightly above average, and an SMR rank of a D, below average. Xilinx (Nasdaq: XLNX) has an EPS score of 57 which is average, but the SMR grade is an A which is above average. Integrated Device Technology (Nasdaq: IDTI) has an EPS score of 67 an SMR grade of a B, slightly above average. Qualcomm (Nasdaq: QCOM) scores a 53 on the EPS rank and a B on the SMR grade.
Looking at the sentiment toward these four stocks, we see that AMD is the only one that has seen its EPS estimate boosted over the last 30 days, moving from $0.07 to $0.08. The other three have seen their EPS estimate remain constant over the last 30 days. Qualcomm has the lowest sentiment reading at this time while AMD and Xilinx both have sentiment readings that are slightly lower than normal. IDTI’s sentiment reading is right in the middle.
One thing that isn’t in the table is how the stocks have performed on a technical basis. Five of the six stocks have performed above average on this basis with the lone exception being Qualcomm. AMD has actually been the best performer over the past year as the stock price has nearly doubled. Intel performed slightly worse than the overall market while Qualcomm is down almost 20 percent over the past year. Xilinx, Texas Instruments and IDTI have all performed well above average, gaining twice as much as the overall market or close to it.
Taking all of these factors in to account- the fundamentals, the sentiment and the technical picture, I would say that AMD, Xilinx and IDTI have the best chance at surprising to the upside while TXN and Intel have the greatest chance at disappointing. That doesn’t necessarily mean that the earnings miss their target, but the reaction to the earnings indicates that investors are disappointed with the results.