Trade of the Day: Semtech Corp (SMTC)

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This morning I am recommending a bearish trade on Semtech Corporation (NASDAQ:SMTC), an analog and mixed signal semiconductor supplier. With China still playing tough on trade, semiconductor stocks are still weak.

Shares of SMTC dropped throughout September and early October, and during last week’s selloff, the stock dropped below levels not seen since May 2018. While the broader market declined last week, there was also a sector specific panic on Wednesday morning.

Texas Instruments (NASDAQ:TXN) and STMicroelectronics (NYSE:STM) reported modest fourth quarter guidance, with STM blaming slowing business in China. Market participants saw this as a sign of weakness to come in stocks like SMTC, which fell by more than 10% that day.

The U.S. has repeatedly refused to restart trade talks with China since negotiations stalled in mid-September. President Trump and President Xi Jingping are meeting at the G20 Summit in November, but Trump’s top trade advisor, Peter Navarro, is unlikely to change his position. If there is no deal after next month’s meeting, I do not think the market would take that well.

TXN remains unconcerned about short-term tariff issues because its largest customers usually set up long-term contracts, but SMTC collected 56% of its revenue from China according to its most recent earnings report. Keeping that and the broader market correction in mind, I recommend opening a put option on SMTC today.

Buy to open the Semtech Corporation (SMTC) Dec 41 Puts (SMTC181221P00041000) at $1.60 or lower.

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