Semiconductor Pullback: A Buying Opportunity?

The VanEck Vectors Semiconductor ETF (NYSEArca: SMH) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) both posted first-quarter gains north of 6%, but March was unkind to chip stocks. The two semiconductor exchange traded funds struggled last month, prompting some market observers to speculate that chip stocks are on the verge of a correction.

Investors could be paying up for future catalysts for semiconductor and broader technology names. If there is a silver lining for the rising valuations on chip stocks it is that some industry observers believe the group’s valuations should not be measured in the traditional sense because of the evolution of the semiconductor business.

“The U.S. semiconductor space is expected to post nearly 11 percent sales growth this year following a 17 percent increase in 2018, according to data compiled by FactSet. Earnings are forecast to rise by 23.5 percent,” reports CNBC.

There are some risks to consider with semiconductor stocks and ETFs. For example, President Donald Trump has pushed for restrictions on trade barriers with China, which might pose a threat to the sector. China is a key market for the global semiconductor industry, consuming more than $100 billion worth of semiconductors or roughly one-third of the world population.

Looking For Value

While some semiconductor stocks are considered richly valued relative to the broader technology space, there are areas where the chip ETFs can become compelling.

“The SMH currently trades at 23 times trailing earnings, slightly below the 23.6 times multiple on the Nasdaq. Individual sector names such as Nvidia and Texas Instruments trade at even higher multiples. The group’s valuations shot up through February and early March after hitting a year-to-date bottom on Feb. 8,” according to CNBC.