3 Stocks To Buy As The Semiconductor Shortage Persists

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For over a year, semiconductors have been one of the leading industries pushing this bull market higher. This is evident from the sector’s outperformance in addition to impressive earnings growth by many companies in the industry. Since the March 2020 low, the VanEck Vectors Semiconductors ETF (SMH) is up 163%, while the S&P 500 is up 94% over the same timeframe.

Even more interesting is that many of the leading companies in the industry have seen their price-to-earnings ratios decline over the past year, as earnings growth has outpaced stock price appreciation. Notably, this is not the case for the S&P 500 which has seen significant multiple expansion. 

Like a lot of tech and growth stocks, semiconductors have underperformed since mid-February. Unlike many of those stocks, semiconductor stocks have continued to post strong earnings reports and look poised to start outperforming once again. Three semiconductor stocks that investors should consider buying are Applied Materials (AMAT), Broadcom (AVGO), and Texas Instruments (TXN).

What’s Unique About This Cycle

Typically, semiconductors are a cyclically sensitive industry, as spending on tech fluctuates with economic growth rates. However, this changed during the pandemic, as tech spending exploded as companies and people had to adapt to the new normal. Many stimulus payments also went to items such as computers, phones, TVs, etc.  

So, while demand increased, semiconductor companies faced the same challenges as many industries when it came to production. Companies had to grapple with meeting health requirements as well as supply chain disruptions. Most companies operate on a just-in-time inventory basis. While this strategy maximizes profits and minimizes waste during normal periods, it exacerbated production issues as key components would be unavailable. 

As a result, we are seeing the effects in many industries that are reliant on semiconductors, such as autos. Another factor is that semiconductors are now found in all types of items that weren’t considered high-tech in the past like refrigerators, fire alarms, and washing machines, and this is having an impact on supply and demand.

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