Semiconductor stocks weathered intense selling pressure during May amid ongoing U.S.-China trade tensions, which involved Chinese telecommunications giant Huawei getting placed onto the Commerce Department's Bureau of Industry and Security (BIS) Entity List after President Donald Trump declared a national emergency over threats to American technology.
The restrictions, which some analysts believe the Trump administration may use as a bargaining chip in the ongoing trade war between Beijing and Washington, effectively places a ban on American companies doing business with Huawei, the world's third largest purchaser of semiconductors.
"We view the Huawei and China/U.S. relationship as a negative overhang on the semiconductor space, and a lift of either would likely send the semiconductor industry materially higher (5% to 10%, in our view)," Royal Bank of Canada analyst Mitch Steves told CNBC.
Despite uncertainty regarding the duration of the sanctions, three integrated circuit stocks with Huawei exposure now sit at crucial technical support that could see bargain hunters snap up their beaten-down shares. Those who want to position for a relief rally should consider implementing these trading tactics.
Analog Devices, Inc. (ADI)
With a market capitalization of $35.91 billion, Analog Devices, Inc. (ADI), manufactures and markets integrated circuits that leverage analog, mixed-signal and digital signal processing technologies. Industrial and automotive end markets account for over 50% of the chip maker's sales. Although the company doesn't have as much exposure to Huawei as some of its competitors, its revenue from the Chinese telecommunications giant still ranges between 5% and 10%. Analysts have an average price target on the stock at $117.61 – a 21% premium to Tuesday's $97.11 closing price. Although Analog Devices' share price is up 13.77% year to date (YTD), it has fallen 15.14% over the past month as of May 29, 2019. Investors receive a 1.86% dividend yield.
The Analog Devices share price continued trending higher for two months after the 50-day simple moving average (SMA) crossed above the 200-day SMA, referred to as a "golden cross" signal, in late February. However, sellers have unloaded the stock throughout May amid the escalating U.S.-China trade war and the Huawei restrictions. Bargain hunters may see value in the stock at the $97.50 level, where the price finds support from a horizontal trendline and 200-day SMA. Traders who enter here should look for an initial move to resistance at $105, followed by a test of the 52-week high at $118.54. Cut losses if the stock fails to hold the 200-day SMA.
Xilinx, Inc. (XLNX)
Xilinx, Inc. (XLNX) designs and develops programmable logic devices used to build reconfigurable digital circuits. Its components power devices in the communications, data processing, industrial, consumer and automotive markets. Nomura Instinet analyst David Wong believes that the restrictions imposed by the U.S. government against Huawei pose a risk to chip maker's top line. He estimates that 10% to 20% of the company's March quarter sales came from the Chinese telecommunications conglomerate. Trading at $101.70 with a market cap of $25.82 billion and offering a 1.23% dividend yield, Xilinx stock is down 14.18% over the past month but is outperforming the semiconductor industry average by 0.73% over the same period as of May 29, 2019.
Xilinx shares rallied sharply between January and late April before the April 25 earnings gap lower soured sentiment after the company missed analysts' bottom-line projections. Despite the current negativity surrounding chip stocks, buyers may return to Xilinx looking for a bargain between $95 and $100, where the price encounters crucial support from the December swing high and 200-day SMA. Traders may decide to wait for a reversal in price action, such as a hammer or bullish engulfing pattern, before taking an entry. Those who buy the stock should set a take-profit order near overhead resistance at $120. Place a stop at $90 to protect trading capital.
Skyworks Solutions, Inc. (SWKS)
Woburn, Massachusetts-based Skyworks Solutions, Inc. (SWKS) develops and manufactures a range of proprietary semiconductor products for devices that are used to enable wireless connectivity. Per a recent CNBC article, Canaccord Genuity Group analyst T. Michael Walkley said Skyworks generated below 10% of its revenue from Huawei in 2018, but he believes that it could represent about 10% of revenue due to 5G infrastructure demand if the restrictions get lifted. From a valuation perspective, the chip producer trades at a discount to its competitors with a price-to-earnings ratio (P/E ratio) of 11.4 compared to 17.4 for the industry average. As of May 29, 2019, Skyworks stock has a market value of $11.75 billion, issues a 1.72% dividend yield and is down 21.41% over the past month – giving back the lion's share of its 2019 YTD gains in the process.
Skyworks completely reversed its steep fourth quarter loss in the first four months of 2019. The stock's positive start to the year ended abruptly in May, with the price collapsing below the 200-day SMA as investors fretted over how the Huawei sanctions would affect Skyworks' profitability. Buyers may find the recent pullback too tempting to resist, with the relative strength index (RSI) giving a reading in oversold territory and the price sitting near vital support at $67.50. Traders who take a position should aim to book profits near $80, where the stock may run into headwinds from a horizontal line and the falling 200-day SMA.