Don't Miss This Sector

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If there's one place you want to be this year, it's in semiconductor stocks.

After snoring its way to a 5% decline in 2012, the chip sector is going to look more like Flash Gordon than Rip van Winkle in the New Year. Projections are calling for across-the-board revenue growth of as much as 10% – and some parts of the chip market could advance at three times that already-hefty pace.

Double-digit growth in a slow-growth economy is pretty great all by itself. But the fact that semiconductor stocks have actually been negatively correlated to the broader stock market means this is an investment that could also serve as a bit of a hedge against a drop in the Standard & Poor's 500 Index.

So let's take a little tour of the latest forecasts.

Our first stop will be accounting-and-consulting firm KPMG LLC.

In its latest Global Semiconductor Survey, which it conducts annually, KPMG found that three-quarters of the semiconductor executives it polled are expecting revenue growth this year. Two-thirds expect to hire more workers (up from 48% in last year's survey) and 71% say annual industry profitability will increase in 2013.

The survey, conducted in September, polled more than 150 sector leaders – primarily senior-level executives – at device, foundry and "fabless" manufacturers. Half of those companies have revenues of $1 billion or more.

The execs' consensus viewpoint: The semi sector will experience a recovery that builds up steam – especially heading into the second half of the year.

Let's consider a couple of other predictions.

The Semiconductor Industry Association (SIA) – the chip sector's chief trade group – says worldwide semiconductor sales will advance 7.2% this year after a tepid 0.4% gain in 2012. And market forecaster International Data Corp. (IDC) says global semi growth will reach 4.9% this year after a flat 2012, with most of the growth loaded into the second half of 2013.

Even Forbes columnist Jim Handy – an industry analyst and former chip-industry insider who predicted a flat 2012 in the face of industry bullishness – is expecting a strong semi-sector showing in the New Year. It was Handy who said that growth could reach 10% in 2013 – following a decline of as much as 5% last year.

"2013 will be a turning point for the semiconductor market … growth will return from negative numbers," Handy wrote on New Year's Eve. "Investors who understand this will be able to properly navigate the timing of their semiconductor investments to maximize their return."

If these numbers still aren't igniting your excitement fuse, you have to remember that the figures contained in these forecasts are just averages. To truly understand where and when to invest, you have to look behind the numbers. You need to see what the chief growth drivers are, and know where the major growth is taking place – before you can render a thumbs-up or thumbs-down verdict on the semi sector as a profit play.

And this time around – with the surge in semi sales we see for the year – there's been a change.

During the Golden Era of baseball, when Joe DiMaggio, the so-called "Yankee Clipper," patrolled centerfield for the Bronx Bombers, baseball fans had a saying: "As DiMag goes, so go the Yankees."

For years, there's been a similar corollary in the chip market: As the beige box goes, so go semiconductors. In short, during the halcyon days of the "Wintel" monopoly, computers – especially PCs – drove sales. So each time there was a new chip or operating-system upgrade cycle, semi sales soared.

Now, however, computers have fallen back to the No. 3 slot in terms of importance. And even wireless devices have been leapfrogged by the new king: consumer devices.

The Consumer Electronics Association (CEA) says consumer electronic sales advanced an estimated 5.9% on a global basis in 2012, and expects that growth to carry over into the New Year. And the big drivers will continue to be tablet computers and smartphones.

Tablet shipments for the current year are projected to exceed 105 million units, generating $35.6 billion in shipment revenue. That represents an increase of 54% on a unit basis and 22% on a revenue basis.

Smartphone shipments will exceed 125.8 million this year, a jump of 16%. Total revenue: $37 billion.

Networked-enabled TVs (20% growth in 2012) and 3D-enabled displays (75% growth last year) will also contribute to growth.

These catalysts are important to understand because the consumer-electronic and computer markets together account for about 60% of all semiconductors sold.

But new catalysts are emerging. Demand growth is also coming from autos, industrial uses and energy. Indeed, industry executives told KPMG that "renewal energy" (insider jargon for battery technologies) will be a major growth driver over the next three years.

IDC says global semiconductor sales will reach $319 billion in 2013. In the longer term the global semiconductor market will show a compound annual growth rate (CAGR) of 4.1% percent from 2011 to 2016, reaching $368 billion in 2016. If that projection is right, we're looking at several more years of growth beyond this one, meaning the right stock picks could provide a nice payoff.

And don't forget the afore-mentioned bonus – the possible hedging effect … a pretty nice potential bonus, given the uncertainty of the current markets.

In a study done last month, market researcher Bespoke Investment Group LLC (BIG) said that, in the prior six months, the only sector that was actually "negatively correlated" to broader stocks is the semiconductor sector (-0.21). So if you are really concerned that U.S. stocks could sell off, this could be one investment that will provide actual growth – and act as a hedge against a market downturn.

We'll come back next week with some specific stock recommendations to let you capitalize on this.

[Editor's Note: We recommend investors employ a 25% "trailing stop" on all recommendations.]

  1. ryan sharif | October 15, 2013

    Bill,
    I always enjoy reading your articles. To be honest 1/2 the reason I became a member of Bill Patalon's Private Briefing was because of your interesting way of looking and talking about stocks and our country's financial status, and I appreciate it. Even though I go to work at 8AM California time, I always get up at 5AM just to read your articles. Somehow it relaxes me beside giving me good information. Whether or not I gain anything on stocks based on you advice is secondary.

    One more thing I want to ask you: please tell your friends who put a video on and talk about stocks, either shorten the time of video and get to the point (I can tell you most people don't even bother to watch the videos because half the talks are boring and give no information, and guys like me know that at the end they want us to subscribe to whatever they have) so by shortening the video they still can say what they want to say and if people are interested will join them. Long videos are boring, aggravate people, and whether or not the speaker's assessment is false or true, people like me, which I am sure are many, half way through the video, they give up or as soon as they see it is a video they won't even bother to listen to it. If they think this motivates people, they are wrong. In fact, it puts them off.

    Last but not least, I wonder if it is possible for you to tell your subscribers when to sell the stocks you recommend and get out of it. I am also a member of Shah's group, and I get good information from him too beside his recommendations, but we won't get much emails from him. To me it doesn't matter if he is right or wrong about a sector or an stock. If he is wrong, he admits, and he usually in time before it is too late, does tell us when to sell a particular stock or option.
    Remember we are not George Soros, warren Buffet, hedge funders …… we are average people we neither have the information, connection, or the money they have. We rely on you guys.

    Thanks,
    Ryan

    • (Admin) Bill Patalon | December 13, 2013

      Ryan:

      Wanted to thank you personally for your note. I gave you a "shout out" in a column recently … saved your comments for just the right moment.

      Hope that our research has continued to please you.

      Please feel free to drop me a note here sometime.

      Respectfully yours;

      Bill Patalon III

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