Chip Stocks Are On A Roll: 5 Solid Buys

Following a dreadful 2018, chipmakers are hot again on encouraging trade talks and a rebound in China’s manufacturing activity. Adding to the optimism is industry rationalization and slew of new technological trends like Internet of Things, high-end gaming and 5G wireless. At the same time, reports of smartphone market recovery are taking chip stocks higher.

Given the bullishness, investing in solid semiconductor stocks seems like a foolproof plan.

Trade Optimism, Stronger China Economy

The Philadelphia Stock Exchange Semiconductor Index, the benchmark for chipmakers, took a beating last year amid rising trade tensions between the United States and China. Also, Beijing’s weak economy was a serious headache for chipmakers as it could dent demand for semiconductor components. But, such worries have now ebbed significantly. This year, the index outpaced the broader S&P 500 on progress in U.S.-China trade talks and better-than-expected manufacturing numbers from the world’s second-largest economy.

Both the U.S. and Chinese trade officials have begun talks to bring an end to their prolonged trade dispute. Myron Brilliant, executive vice-president of international affairs at the U.S. Chamber of Commerce, recently said that “ninety percent of the deal is done, but the last 10% is the hardest part, it’s the trickiest part and it will require trade-offs on both sides.” Nonetheless, resolving most of the differences is a reassuring sign for chipmakers as they are heavily dependent on China for revenues.

China’s growth concerns, by the way, have dissipated to a great extent. China’s official Purchasing Managers Index made a stellar comeback in March, rising to a six-month high of 50.5 from 49.2 in February. Beijing took adequate steps like tax cutting to stimulate manufacturing activities.

Encouraging Prospects

The prospects of chipmakers have improved substantially this year on initiatives to improve efficiency. In the DRAM market, the number of producers has now consolidated to just three — Samsung Electronics, SK Hynix Inc. and Micron Technology, Inc. (MU - Free Report) . This structural change has improved efficiency and raised profit margins.

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