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Semiconductor Stocks Now Cheaper Than Industrials: Here's How You Can Play It

Semiconductor Stocks Now Cheaper Than Industrials: Here's How You Can Play It

The iShares PHLX Semiconductor ETF (NASDAQ: SOXX) traded lower by 2.6% on Tuesday morning (although it recovered to end the day slightly positive) and is now down 11% in the past month as a global semiconductor shortage drags on.

Bank of America analyst Vivek Arya discussed the recent weakness in semiconductor stocks in a new research note and pointed out that semis are even becoming attractively valued relative to traditional value stock sectors.

Semis Vs. Industrials: Arya said semiconductor stocks have many similarities to traditional industrial sector stocks. However, a broad market rotation out of traditional growth stocks like semis and into value stocks has left the semiconductor group trading at just 21 times 2021 earnings, while the industrial sector trades at 27 times 2021 earnings.

Related Link: Here's Why Stock Valuations Are Still 'Quite Reasonable'

Arya pointed out that semiconductor fundamentals are far superior to industrial fundamentals. For example, semis generate average FCF margins of 29%, more than double the 12% industrial stock average.

At the same time, industrial and auto companies are certainly not immune to the semiconductor shortage, and both groups benefit from U.S. infrastructure spending. Finally, Arya said first-quarter gross margins suggest semiconductor stocks are great at passing along rising input costs to their customers, making inflation a bullish catalyst for the group.

“We believe seasonality (Q1/Q4 better for SOX than Q2/Q3) and news around auto plant re-openings (inevitable at some point) could be the two catalysts for a potential recovery in semi stocks,” Arya said.

How To Play It: With S&P 500 semiconductor stocks trading at an average of just 18.7 times projected 2022 EPS, Arya said the group is “not expensive” at current levels and the recent sell-off could be a buying opportunity.

Arya’s top semiconductor stock picks include names like Applied Materials, Inc. (NASDAQ: AMAT), Advanced Micro Devices, Inc. (NASDAQ: AMD) and NVIDIA Corporation (NASDAQ: NVDA).

Benzinga’s Take: Investors that agree with Arya's take that semis have become undervalued relative to industrials can consider a pair trade of going long the SOXX ETF and short the Industrial Select Sector SPDR Fund (NYSE: XLI). The XLI is up 2.5% overall in the past month as investors have rotated out of growth stocks.


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