One of the biggest beneficiaries of the pandemic was stocks in the chip industry. Many investors made out like bandits betting on semiconductor stocks last year but might miss out on the next upsurge.
That’s because it’s not widely known that a part of the National Defense Authorization Act of 2021 is expected to boost chip companies and investors' fortunes. That's why you must continue reading.
If we position our portfolios to take advantage of this opportunity, we can navigate a market where technology stocks have been held captive to treasury yield fluctuations.
That's why I am recommending semiconductor stocks like Intel Corporation (INTC), Texas Instruments Incorporated (TXN), and Analog Devices, Inc. (ADI). But first, let's recap the past week before I dig deeper into these companies.
Stocks rose on Monday as the latest stimulus checks reached many American’s bank accounts, and interest rates stabilized after a recent rise. Tech stocks are sensitive to changes in interest rates, so tech stocks ran higher on Monday with rates down during the day. The Dow Jones Industrial Average and S&P 500 both closed at record levels. The markets were mixed on Tuesday, with investors taking profits in value stocks. Investors also kept an eye on the Federal Reserve's monetary policy meeting, which started on Tuesday.
The market surged again on Wednesday after the Federal Reserve said it planned to remain accommodative. This helped calm investor nerves. Both the Dow and the S&P 500 closed at new closing records on the day. Unfortunately, this momentum reversed course on Thursday as interest rates resumed their rise. The 10-year Treasury yield closed at 1.72%, and tech stocks stumbled.
Stocks were mixed today after both the S&P 500 and Dow finished lower while the Nasdaq finished the day up. Volume was also up for the day as options and futures on indexes and equities simultaneously expired today, known as quadruple witching.
I believe the market volatility will continue as investors remain concerned over inflation and treasury yields. Many are betting on inflation to rise faster than official estimates due to the massive stimulus and the Fed's current ultra-low interest rate policy. That's why we need to look for growth catalysts in the market, such as the chip industry, which should see incentives and subsidies soon that could send their shares flying.
The National Defense Authorization Act of 2021
The chip shortage, which was triggered by the U.S. & China 's trade war and increased sales of PC's during the pandemic, is an issue that President Biden is trying to fix. That's why Congress authorized a series of incentives for U.S.-based chip companies earlier in the year. The programs were included in the National Defense Authorization Act for fiscal 2021. The legislation passed in January, but funding was not included. That is expected to change soon, as $35 billion is likely to be included in a bill during the second quarter.
The funding will be a boon for U.S. semiconductor companies, which is why I'm highlighting the companies below.
Intel Corporation (INTC)
Back in the summer, INTC was all but left for dead after it reported a delay in its new chips. But things are changing, and INTC is making a comeback. The company is one of the world's largest chipmakers. It designs and manufactures microprocessors for the global personal computer and data center markets.
The company was previously known for its PC-centric business but is now shifting to data-centric businesses such as artificial intelligence and autonomous driving. In fact, its data-centric businesses accounted for almost half of its total revenue last year. To increase its market share in this business segment, the company has made investments in the Internet of Things (IoT) and memory and storage. As more information is stored in the cloud, there is a demand for more efficient chips in both cost and energy.
Still, the increase in computer sales has also helped the company in the meantime. INTC has an overall grade of B or a Buy Rating in our POWR Ratings system. It has a Value Grade of A, which makes sense with a trailing P/E of 12.30. The company also has a Quality Grade of A due to its strong balance sheet. As of December, INTC had $23.9 billion in cash on hand. That's well above the $2.5 billion in short-term debt it's carrying.
To access INTC's other grades (Growth, Momentum, Stability, and Sentiment), click here. The company is ranked #13 in the Semiconductor & Wireless Chip industry. For more top stocks in that industry, visit this link.
Texas Instruments Incorporated (TXN)
While many people remember TXN from its well-known calculators, 95% of its revenue is actually generated from semiconductors. The company is the world's largest maker of analog chips used to process real-world signals such as sound and power. It also has a leading market share in digital signal processors used in wireless communications and microcontrollers used in various electronics applications.
TXN has a bright future ahead of it due to its focus on the Internet of Things (IoT) and 5G customer deployments. The recent emergence of 5G is aiding performance in TXN analog products. The opportunity in IoT is huge for semiconductor companies, as it connects every imaginable electronic device.
TXN is also seeing success in the automotive market. It provides solutions for infotainment, safety, powertrain, and body electronics such as lighting. The company has a grade of B or a Buy rating in our POWR Ratings system. It has a Momentum Grade of B as well. This is due to its mid and long-term performance. TXN also has a Quality Grade of A, meaning its balance sheet is rock solid, highlighted by a current ratio of 4.3, indicating it has more than enough cash to handle short-term obligations.
For TXN's other grades, including Growth, Value, and Stability, click here. The company is ranked #18 in the Semiconductor & Wireless Chip industry.
Analog Devices, Inc. (ADI)
ADI is one of the world's largest analog chipmakers. It has a significant market share lead in converter chips, which are used to translate analog signals to digital and vice versa. It serves tens of thousands of customers, and more than half of its chip sales are made to industrial and automotive end markets. ADI's chips are also incorporated into wireless infrastructure equipment.
The company is poised to benefit from more advanced and higher-priced semiconductor content in automobiles, such as battery management systems, autonomous capabilities, and infotainment systems. ADI should also see gains from 5G adoption and demand for optical connectivity products from wireless carriers and data center providers. In addition, industrial applications like medical devices and factory automation equipment are expected to aid growth in the future.
The company has an overall grade of B or a Buy rating in our POWR Ratings system. It has a Momentum Grade of B, which isn't surprising since the stock has shown recent strength. ADI also has a Quality Grade of B. It has a current ratio of 1.6 and a debt-to-equity ratio of 0.4. We also grade ADI based on Growth, Value, Stability, and Sentiment. You can find those grades here.
ADI is ranked #37 in the Semiconductor & Wireless Chip industry.
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INTC shares rose $0.09 (+0.14%) in after-hours trading Friday. Year-to-date, INTC has gained 29.52%, versus a 4.17% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.3 Chip Stocks That Could Soar from Government Incentives appeared first on StockNews.com