One of the more interesting developments to come out of President Trump's sideline meeting with President Xi at the Group of 20 (G-20) summit in Osaka was that the United States will potentially remove some of the restrictions on suppliers doing business with embattled Chinese telecommunications giant Huawei Technologies. The company was added to the U.S. Commerce Department's entity list in May after the president deemed it to be a national security threat.
The reprieve from certain trade sanctions may help Huawei renew some of its partnerships with U.S. semiconductor companies that supply components for consumer technology like smartphones and PCs. However, restrictions on networking hardware will likely remain in place after White House economic advisor Larry Kudlow told Fox News Sunday that President Trump's decision to let Huawei buy some additional U.S. products is not a general amnesty.
"There were few concrete details about when Huawei can be removed from the entity list," said Jeff Pu, a Hong Kong-based analyst at GF Securities, per Bloomberg. "But investors are showing optimism without waiting for a final outcome," he asserted.
Traders who think that semiconductor stocks may continue to move higher in subsequent sessions as investors factor in the "eased Huawei restrictions" should keep a close eye on these three names that have significant exposure to the Chinese telecom gear maker. Let's look at each stock in more detail and explore possible trading opportunities.
Microchip Technology Incorporated (MCHP)
Microchip Technology Incorporated (MCHP) manufactures and sells semiconductor products for various embedded control applications in the Americas, Europe, and Asia. Its chips power a variety of electronic devices – from remote control units to power windows in vehicles. Microchip's eight-bit MCUs, which suit less technologically advanced devices, may benefit from eased restrictions as they pose virtually no threat to national security.
The chipmaker posted mixed 2019 fiscal fourth quarter (Q4) results. Earnings per share (EPS) came in at $1.48, surpassing estimates of $1.39 per share. Although reported revenue of $1.329 billion missed analysts' forecasts by $8 million, it fell within management's guidance range of $1.279 billion to $1.375 billion. Microchip stock has a market capitalization of $21.75 billion, issues a 1.69% dividend yield, and is trading up 28.10% on the year as of July 2, 2019.
Since crossing the 200-day simple moving average (SMA) in February, the company's shares have had two retracements back to the closely watched indicator – in March and May – before recovering somewhat in June. The stock gathered momentum Monday, breaking above an ascending triangle and the 50-day SMA on the back of positive G-20 trade negotiations. Those who trade the breakout should anticipate a move up to the May high at $100.91. Consider placing a stop-loss order either beneath yesterday's low or under the 50-day SMA, depending on risk tolerance.
Skyworks Solutions, Inc. (SWKS)
Skyworks Solutions, Inc. (SWKS) produces semiconductors for handsets and other devices used to enable wireless connectivity. Its product portfolio includes amplifiers, antenna tuners, switches, and integrated front-end modules. Under the revised restrictions, the chip giant may be able to commence supplying Huawei with specific components used for consumer smartphones.
Skyworks Solutions, which generates 12% of its revenue from the Chinese communications conglomerate, saw its top-line year-over-year (YoY) growth decrease 11.3% in the second quarter (Q2). Trading in the low $80s with a $14.15 billion market cap and offering a 1.97% dividend yield, the stock has returned 16.43% year to date (YTD), roughly in line with the semiconductor industry average over the same period as of July 2, 2019.
Skyworks shares have had a roller-coaster ride throughout 2019. The stock completely reversed its steep Q4 loss in the first four months of this year before surrendering most of those gains in May as the U.S.-China trade war intensified, with Huawei becoming a key bargaining chip. Bullish upside momentum returned in June and has continued into early July. The breakout above the 200-day SMA on above-average volume in Monday's trading session provides an enticing swing trading opportunity. Those who enter at current levels should aim to book profits on a test of the 2019 YTD high at $93.88 and protect against downside risk with a stop positioned slightly beneath the breakout candlestick's low at $80.96.
Cree, Inc. (CREE)
Cree, Inc. (CREE) provides lighting-class light emitting diode (LED) and semiconductor products for power and radiofrequency (RF) applications. The Durham, North Carolina-based company manufactures its products for use in applications such as indoor and outdoor lighting, video displays, transportation, electronic signs, power supplies, solar inverters, and wireless systems.
Last month, the $6.25 billion chip manufacturer slashed its fiscal Q4 profit and sales outlook, citing the government's ban on U.S. companies supplying Huawei for the downward revision. Cree had expected revenue for products and materials associated with the Chinese tech giant's wireless infrastructure build-out to be about $15 million during the period. It remains unclear if the company can recommence supplying some of its more consumer-focused products to Huawei. As of July 2, 2019, Cree stock has gained 38.73% YTD, outperforming both the industry average and S&P 500 by 17.33% and 20.48%, respectively.
Cree shares tracked steadily higher between January and April, with only very minor pullbacks to the 10-day SMA over that period. The stock followed other semiconductor companies lower throughout May and has struggled to shake off bearish sentiment after cutting its sales and profit outlook. However, a move above crucial resistance at $60 could trigger a rally toward the April swing high at $69.21. Furthermore, a relative strength index (RSI) reading of just above 50 gives the stock ample room to test higher prices. A close beneath the trendline stretching back to October 2018 would invalidate long setups.