No. 1 Pick for Semiconductors’ Double-Digit Boom
After a rough ending to 2018, the stock market was on fire to start the new year.
Through March, it was the best start to a year since 1998, and everyone was calling for new highs. Including me!
But then something happened.
On May 5, the Trump administration announced that it’d be putting tariffs on billions of dollars’ worth of Chinese imports. And like that, fear took over the market once again.
Overall, May ended up being a disaster. The S&P 500 Index lost about 6.6% of its value. And the tech-heavy Nasdaq fell almost 8%, one of the worst months in its 48-year history.
But the part of the market that was hit the hardest was semiconductor stocks.
This sector fell 15.5% last month, its worst month since the financial crisis.
The mainstream media’s doom-and-gloom headlines have investors running scared from this industry. But today I’m going to explain why this is actually the perfect buying opportunity.
The Demand for Semiconductors Is Stronger Than Ever
Semiconductors are tiny chips that transmit electricity through just about every electronic device that we use. And with the extreme advancements in tech over the past decade, there’s plenty of demand for them.
However, the highest demand in the world for semiconductors comes from China. It makes the most computers, phones and industrial robots in the world.
China plans to make over 1.1 million industrial robots over the next six years. To put that in perspective, it has the most in the world right now at about 200,000.
That’s a huge goal. And, of course, China will need an enormous number of semiconductors to make that happen.
So, the demand for semiconductors is strong in China. However, almost half of the world’s semiconductors are made in the U.S.
Every year, the U.S. sends China about $200 billion worth of semiconductors. That’s about 10% of China’s total imports!
Now there’s a trade disagreement between the top exporter and importer of semiconductors. That creates a lot of uncertainty about the future, which is why we’ve seen semiconductor stocks fall so much.
A Potential Crisis for China
In short, China needs our semiconductors. This has been made clear with recent action taken against Huawei, China’s biggest mobile phone manufacturer.
Huawei relies heavily on some of the biggest semiconductor manufacturers in the world, such as Intel and Xilinx. However, it has been severely affected by the trade war, because all of a sudden its supply from these companies has been cut off.
Huawei sold 59 million smartphones and made about $27 billion last quarter. And now it has to completely shut down its operations.
There are also plans in the works to cut off hundreds more companies that rely on the United States if trade talks continue to stall.
China is completely unprepared to deal with that. So, I believe that a deal will be made sooner rather than later to avoid a potential crisis.
Big Companies Are Getting Great Deals
This sudden drop in semiconductor stocks has also attracted buying interest from other companies.
This past Monday, a company called Cypress Semiconductor was bought out for $10 billion by another semiconductor maker. It’s up 44% since Bloomberg reported on the potential sale on May 29.
The company buying it is paying a huge premium, as Cypress’ market value was only $5.6 billion just last week.
It’s always a great sign when you see this kind of activity going on. Companies aren’t going to spend an amount such as $10 billion unless they really believe they’re getting a good deal.
Another company, called Aquantia, was bought out last month for $452 million, about 32% above its market value. It’s up 37% since the May 6 acquisition. Again, this shows lots of interest from big companies that are looking to expand their business.
Make Double Digits From Semiconductors’ Comeback
The trade war has lowered a lot of stock prices, particularly in the semiconductor industry. That means it’s a great opportunity to buy.
So, today I’m recommending buying into the VanEck Vectors Semiconductor ETF (NYSE: SMH). This is a fund made up of 25 big semiconductor companies, all packed into one stock.
Because of the constant advancement in technology, semiconductors are always in demand. And SMH is down 17% since April 23. So it’s a great time to buy in and make double-digit gains as semiconductor stocks bounce back.
Editor, Rapid Profit Trader