Semi Conductor Investing in 2014: Is this finally the year Semiconductor investors strike it rich? While I’m hesitant to be too alarmist in my introductions, semiconductors might be worth a look if you are in the market for investing opportunities. So…
In this blog post we’ll look at why semiconductor companies might make a good investment in 2014, as well as a couple actionable ideas you can pursue on your own if you think semi-conductor investing is the right fit for you. Sound good?
Semi Conductor Industry Long Term Technical Analysis
The Semi Conductor industry had been dead money for investors for over 10 years. And semi conductor investors have been unable to see any capital appreciation in the period. Just take a look at the semi conductor industry ETF (SMH) below…
As you can see in the chart above, the semi conductor industry is up against decade long resistance. And while volume has been low running into this resistance, SMH might finally be poking it’s head up against this impenetrable trend line.
Of course investing in the sector ETF is an easy way to get semiconductor exposure in 2014. But if you want to dig deeper into specific companies, here are some of my favourite ways to invest in semiconductors this year…
Under-Valued Semi Conductor Company for Investing in 2014
One under-valued semi conductor company that may be of interest to investors is United Microelectonics Corp (UMC). This semi conductor company is trading at a 30% discount to book value, and the P/E ratio is just above 11. The company also has a relatively light debt burden and should return more free cash flow to shareholders in 2014 after a large year of capital expenditures.
Unfortunately, UMC might be nothing better than a cigar-butt investment scenario. While this semi conductor company is trading below book value, a lot of the company’s assets are in plant and equipment. Unfortunately despite the recent upgrades UMC still lags competitors in terms of competitive advantage and UMC continues to lose market share. So although it appears UMC is undervalued and we might see a bounce higher, it’s not an extremely compelling stock investment idea if the company is struggling to make money going forward.
So are there any other semi conductor investing ideas you can pursue in 2014?
Is This The Best Semi Conductor Company for Investing in 2014?
The leading semi conductor manufacturer in 2014 continues to be Taiwan Semi Conductor (NYSE:TSM). TSM is not exactly a value investor’s dream. But it’s not crazy expensive either.
Hear me out…
TSM is trading at about 3 times book value, which makes it expensive in the eyes of most value investors. On the other hand, the company has a P/E under 15 and last year generated almost $12B of operating income (vs an enterprise value of about $88B). While semiconductor manufacturing is still a capital intensive business, there is lots of free cash flow leftover for management to work with (and hopefully direct towards shareholders).
From a technical analysis perspective, I also like the way $TSM is basing out. Take a look at the monthly chart below…
As you can see from the chart above, TSM is not too extended on the monthly time frame, and if the SMH sector finally moves higher in 2014, TSM could be the main beneficiary. Further, it’s hard to see how TSM could lose market share since it already commands over 50% of the market. So in this case, I might start a position if the stock breaks out of the triangle pattern above and then be a bit more disciplined with my stop loss (since the Graham Number value for the stock is closer to $13). Make sense?
Another best in class play on semiconductor investing in 2014 would be Intel (NASDAQ:INTC). I don’t love the technical pattern as much but it stacks up very well against TSM on the valuation metrics above (like free cash flow yield).
And By The Way: If you’re looking for more information on investing decision making I encourage you to download my free ebook below. You’ll get a ton of valuable perspective on how I’ve refined my approach to stock markets over the years, and that should help you improve your trading too!