3 Chip Stocks to Buy This Year

Markets are nervous but there is good momentum here

chip stocks - 3 Chip Stocks to Buy This Year

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Yesterday, Micron (NYSE:MU) reported earnings and the reaction was positive. In fact, MU stock is up over 15%. This provided positive sympathy moves across the whole semiconductor sector, helping chip stocks like Western Digital (NASDAQ:WDC) and Xilinx (NASDAQ:XLNX).

The tech sector tends to trade in unison, but the semiconductor bunch is even tighter. A move in one ripples across all the rest.

Year to date, all three chip stocks in focus are strong performers. Xilinx stock is the leader of the bunch, up 32%. (Still only half as much as Advanced Micro Devices (NASDAQ:AMD), however.) The other two are still outperforming the S&P 500, so they are all winners. For reference, the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) is up 25% YTD.

Today, I discuss the opportunity that lies in XLNX, WDC and MU stocks for this year and next. These are great companies that have recently had several bouts of negative headlines stemming from the trade war.

The upside effect of going through sharp corrections like this is that they leave important lines behind that become opportunities on the rebound. XLNX, WDC and MU have such lines that will serve as short term triggers but with potential long term bullish effect.

It won’t be easy because these are also areas of resistance along the way. Furthermore, we still have geopolitical challenges, but the world needs tech too badly for the powers-that-be not to find a work-around the current restrictions.

This weekend, during the G20 meetings, Presidents Trump and Xi will meet. No, I don’t expect a deal, but I think they will announce that they brought the talks back on track. This will be the equivalent of kicking the can a few weeks or months long enough to allow the rally in chips stocks to continue.

So far these three chip stocks are outperforming the benchmark and I expect them to continue to do that. They are definitely stocks to buy for this year and the next.

Xilinx (XLNX)

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Xilinx is a strong company with a great reputation. For the last 8 months, it has been a freak of nature stock. While the stock markets are still trying to recover from the crash last fall, XLNX is up 50% from that ledge and 66% off the November low. At its highest it was up 105% off the lows.

Clearly Wall Street loves Xilinx stock so it’s natural to see it carry a high valuation. XLNX’s trailing P/E ratio is 32, which is almost ten times more than that of Micron. So XLNX is not a bargain — but it’s still 60% cheaper than WDC. But even if it were the most expensive chip stock, you get what you pay for and XLNX has rewarded its share owners handsomely. So from that sense, value is not a deterring factor here.

Technically, between $115 and $116 per share is a neckline that if the bulls can breach they can trigger a bullish pattern that would target $126 or higher. At that point, it would come pretty close to filling the open gap to $136 that happened after XLNX’s last earnings report.

This won’t be easy. There will be resistances at $119.50, $122 and $126.8. I consider this more of a tactical opportunity than an investment because the goal is to ride a technical wave to a measured target. So I would set tight stops below at $105.50, $104.30 or $98 depending on your risk appetite.

Western Digital (WDC)

WDC Stock May Be a Steal
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While this year WDC stock is performing well, it is far from its highs. Five years ago it was $114 per share and now it’s under $50. Clearly, it has been systematically out of favor on Wall Street. Today’s opportunity is one that not expect it to recover those all-time high levels, but rather one that suggests mid-term profits.

While Western Digital stock is up big off the December lows, it’s still lagging the indices in a big way. WDC is barely halfway back to the October ledge from which it crashed last year. But if the bulls can overcome $46 per share, they can invite more momentum buyers to get back to $54. This won’t be easy because there are resistance levels along the way especially around $48.50, but with the help of the rest of the sector they can do it.

The zone just above the WDC stock price now has been pivotal of late. So the bulls have their work cut out for them here. But if they are successful then the reward is a rally back up to $64 per share, which was the ledge from last August.

Given the technical aspect of this thesis I consider this to also be a tactical setup especially that the overall trend of WDC stock has been long term negative. Also the valuation is so high here that I can’t justify owning it for that reason either.

Micron (MU)

micron stock
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MU is a cheap stock, especially for a chip stock. It sells at a 3.5 trailing P/E ratio. From that perspective, I consider this a fundamental trade since I am betting on value to profit. But the experts would always note that Micron stock is a value trap. Cheap can get cheaper is the ongoing meme on MU.

Therein lies my opportunity for MU stock today. I have had the best luck trading it with options and by selling puts into what others fear. I leverage the fact that it is cheap and challenge the prevailing meme.

This method suits my personality well because I don’t like to chase a runaway stock — especially one that doesn’t have the reputation of being a momentum stock. Micron rallies don’t get the same fans as say AMD.

Consensus is that the fundamentals in MU are terrible because it’s tied to DRAM which has become a commodity. So it’s always subject to the challenges of maintaining perfect inventory levels and pricing. To that the Micron CEO confirmed that they are managing this into next year and that they are confident that they can succeed.

While this is comforting to know, it’s definitely not a ringing endorsement to chase upside performance in MU stock. But it does create an opportunity to create income without any out of pocket expense.

I can do this by selling the MU October $30 put and collect $1.20 per contract. All I need to win is for Micron stock to stay above it through mid October. Else I own the shares at that price and break even at $28.80. So this method leaves me a 19% buffer between current price and my level of risk.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/3-chip-stocks-to-buy-this-year/.

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