Semiconductor stocks are rebounding after dropping sharply over the last half of the past year, and their current upward momentum looks set to continue. The iShares PHLX Semiconductor ETF (SOXX), after reaching a peak in early March of last year, fell as much as 19% through to the end of the year before rallying 13% since the start of January. “Last year we were nervous about the stocks as fundamentals were peaking and momentum was slowing,” Citi Research analyst Christopher Danely wrote earlier this week. “This year we are becoming more constructive as fundamentals are bottoming and semis are shipping below demand,” he continued, according to Barron’s.

Danely and the rest of his analyst team recommended buying Texas Instruments Inc., Sony Corp., and Taiwan Semiconductor Manufacturing Company. Analysts at KeyBanc Capital Markets favour Xilinx Inc. and KLA-Tencor Corp.

5 Chips That Can Rise

·           Texas Instruments, TXN

·           Sony, SNE

·           Taiwan Semiconductor, TSM

·           Xilinx, XLNX

·           KLA-Tencor Corp., KLAC

What it Means for Investors

Danely believes that the 20% drawdown in Texas Instruments’ shares over the past six months is nearing its bottom, and with a price target of $115 expects a rebound of more than 10%. They also expect Taiwan Semiconductor to be a dominant leader in the sector over the next few years.

As Sony’s earnings having risen to their highest level in 20 years and all of its business segments looking healthy, Citi’s analysts think the company will thrive in the chip space. “Sony’s semiconductor business continues to expand in scale and we believe profit growth is possible in this segment,” wrote the analysts.

Xilinx and KLA-Tencor both made the “Best Ideas in the Face of Uncertainty” list put together by KeyBanc Capital Market’s analyst team. They expect these two stocks to outperform amidst challenges in the chip sector that include a weaker Chinese economy, trade wars, oversaturation in the smartphone market and slower growth in the data center end-market.

“We anticipate 2019 will be a challenging year in semiconductors, with a broad-based slowdown in several end markets,” the analysts wrote, according to an earlier article by Barron’s.

Despite the challenges, the analysts expect some companies to outperform on specific upgrade trends in the technology sector. Healthy demand for wireless infrastructure, including both 4G and 5G, will help to boost Xilinx, and over the past couple of weeks the stock has already surpassed the analysts’ $100 price target.

KeyBanc’s analysts expect KLA-Tencor to reap more benefits than its peers over the short term from a ramping up of 10 nanometer and 7 nanometer foundry/logic processes. Longer-term demand will come from the growing complexity and expansion of end-market demand in the firm’s core semiconductor equipment market.

Looking Ahead

While Citi and KeyBanc are optimistic about these five stocks, they are aware of the challenges currently looming over the global economy. The biggest question mark may be China, whose economic growth this year could be the determining factor in the strength of the semiconductor market. “If China goes into recession, we believe semis will see another big leg down,” wrote Citi’s Danely.