Semiconductor stocks are presenting investors with a bit of a conundrum right now. Members of the chip space have some of the top-rated companies in terms of their fundamental indicators, but the charts for several semiconductor stocks are showing multiple layers of resistance that the stocks will have to fight through.
The Philadelphia Semiconductor Index (SOX) peaked at 1,464.61 in March before falling through late April. The index bounced back through May and early June and it was able to get back above the 1,425 level. The SOX was able to grind sideways through the summer, but the index fell sharply in October. It ended up falling over 16% from the beginning of the month through Oct. 29.
The index itself has held up much better than some of its most prominent components. Since the March high, the SOX is down 16.9%. Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX), Microchip Technology (NASDAQ:MCHP), Micron Technology (NASDAQ:MU) and Nvidia (NASDAQ:NVDA) are all down considerably more than the index and yet they all have strong fundamental ratings.
All five of these companies get an earnings-per-share rating of 85 or higher from Investor’s Business Daily. That means they rank in the top 15% in terms of earnings growth over the last three years and in recent quarters. The companies also score an “A” in IBD’s SMR rating system. The SMR rating scores companies with an A through an E rating based on the sales growth, profit margin and return on equity.
With that in mind, here are five semiconductor stocks to keep an eye on as they try to power through significant resistance.
Applied Materials (AMAT)
Applied Materials gets an EPS rating of 85. The company has seen earnings grow by an average of 69% per year over the last three years. However, if we look at the weekly chart of AMAT stock, we see that the stock peaked in March and has been trending lower ever since. The chip stock is down 40% since that March peak. You can also see that AMAT stock has formed a downward sloped trend channel.
AMAT has closed above its 13-week moving average since early April and that is the first layer of resistance it will have to overcome, then the upper rail of the channel will come in to play as the next resistance point. The stock has also fallen below its 52 and 104-week moving averages and those trendlines will also act as resistance points.
Lam Research (LRCX)
Like some of the other semiconductor stocks on this list, Lam Research also scores an 85 in the EPS ratings and it has seen earnings grow at an annual rate of 53% over the last three years. LRCX stock has dropped 35% since peaking back in February.
Like AMAT stock, LRCX stock has fallen below all of its weekly moving averages — the 13, 52 and 104-week. The 13-week has crossed bearishly below both the 52-week and the 104-week. Lam Research has also seen a trend channel form, so it has numerous layers of resistance it will have to break through in order to get back above the $200 mark. One particularly interesting point for the stock was in July when the LRCX stock price, the 13-week and the 52-week were all converging around the $186 level. The semiconductor stock closed above the two moving averages that week, but then fell nine of the next 13 weeks.
Microchip Technology (MCHP)
Microchip scores a little better on the EPS rating with an 88. The average earnings growth rate over the last three years has been 38%, which is lower than AMAT and LRCX stock, but the most recent quarterly report showed growth of 28%, which was much better than those two. Unlike the other two chip stocks we have seen so far, MCHP stock peaked in early June. The stock is still down 23.4% from when the SOX peaked in March.
Microchip has a downward sloped channel like the others, but it did manage to move back above its 13-week moving average. That still leaves the upper rail of the channel, the 104-week moving average and the 52-week moving average for MCHP stock to break through if it is going to reach the $100 mark again.
Micron Technology (MU)
Micron’s EPS rating is even better than the other three semiconductor stocks mentioned on this list so far. MU stock scores a 96 in the rating system and its earnings growth has been incredible. The annual growth rate over the last three years has been 143% and EPS grew by 75% in the most recent quarterly report.
Micron peaked at $64.66 back in late May. MU stock has fallen 43.4% from its own peak and it’s down 38.4% from the March peak in the SOX. The first layer of resistance Micron will have to deal with is its 104-week moving average, which it has just recently fallen below. The 13-week moving average and the upper rail of its trend channel are in close proximity to one another, so that could be an especially difficult area for MU stock.
Nvidia has the highest EPS rating of all five of the chip stocks with a 97. The company has seen its earnings grow by an average of 101% per year over the last three years and it saw them grow by 32% in the most recent quarterly report. The NVDA stock chart looks very different from the other semiconductor stocks’ charts, as the stock didn’t peak until the beginning of October. However, from its peak, NVDA stock has fallen 47.7% and it is down 38.7% since the SOX peaked in March.
Because Nvidia has fallen so dramatically in the last few months, it doesn’t have a trend channel like the other chip stocks on the list. However, what it has done that is similar to the other four chip stocks is fall below all three of its weekly moving averages. All three of those trendlines will now act as resistance levels if NVDA stock tries to rally. The abrupt decline has caused the 13-week moving average to cross bearishly below the 52-week. Unless the stock rallies sharply, the 13-week will fall below the 104-week in short order.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.