Recently, over a rather boring weekend, I took the time to update the quantitative model from which is derived the top 25 stock ranking list. Previous monthly lists have shown some concentration in basic materials stocks, but otherwise no strong industry trends have emerged - until the latest informal update I did. Semiconductor-related stocks came to hold 4 of the top 25 positions, and the presence of larger companies in the industry just outside that made me begin to think that sector of the market is primed for outperformance. Because of the attention given by market watchers to the SOXX (the PHLX Semiconductor Index), a strong move from that group would likely spur the Nasdaq in particular to further gains. Although I won’t be releasing the full top 25 list - look for that on June 1st - here is a summary of the semis and how they score:
The 4 stocks making appearances in the top 25 are, in no particular order, Lam Research (LRCX), Novellus (NVLS), Supertex (SUPX), and Micrel (MCRL). While none of those four stocks specifically are in the SOXX, the following components were: National Semiconductor (NSM) and Applied Materials (AMAT) both missed the top 25, but were in the top 5% overall, and Linear Technology (LLTC) is in the top 10%, as was Maxim (MXIM). Xilinx (XLNX) was in the top 15%. KLA-Tencor (KLAC), and Intel (INTC) and Texas Instruments (TXN) are all in the top 20%. Those 8 stocks (the SOXX tracks 19) constitute over 58.5% of the SOXX on a weighted basis, and a check on Taiwan Semiconductor (TSM) indicates it would likely be in the top 15% or so as well - but the model does not rank foreign stocks. Overall, this means that semiconductor stocks - and the ones mentioned here in particular - should as a whole be significant market beating stocks over the next year.
Of the several stocks mentioned here, current favorites of mine are LRCX, which I feel is a slightly better equipment play than AMAT (as outlined here), NVLS, and MCRL. TSM, which is not ranked by the model, also could serve a dual purpose with its leading global position as a foundry as well as by offering investors exposure to international stocks. Taiwan, along with South Korea, remains a preferred foreign market, and the importance of Taiwan Semi in the former cannot be understated.
The bottom line is that semiconductor companies are finally showing decent profitability, and they still have plenty of believers to win over…