We spent much of September with rhetoric of threats to the stock market. Investor sentiment was exceedingly sour on Wall Street. There wasn’t one particular reason for it, but rather many small reasons for the chaos. The headlines singularly were not enough to break this incredible bull market. However, when you have many negative headlines circulating, they can have a collective bearish effect. Smart money did well to continue looking for stocks to buy during this so-called correction.
I use that term loosely because Wall Street defines it to be a drop of 10%. We did not do that, in fact the S&P 500 stayed pretty close to all-time highs. This week we could take those out, if not maybe in the next few to follow. One sector had tangible reasons to suffer. The experts acknowledge that there is a global shortage for semiconductor equipment and components. Therefore, today we look for semiconductor stocks to buy on these dips.
The consequences from such supply disruptions extend beyond the sector. But today we will focus on three leading companies, as they could have better days ahead. The sentiment among investors has repaired itself, but I’m still reading too many bearish opinions. On the one hand, reliable experts are calling for a recession. While at the same time other mavens are warning of runaway inflation.
Since consumer spending remains strong, I contend that these two cannot happen simultaneously.
Therefore, I remain bullish with my thesis going into 2022. The two expert opinions negate each other, and I let facts — not prognostications — drive my trades. The adage on Wall Street that I like best is to not fight the tape. The bulls have been in charge of this price action, and they have not relinquished it. The bears had the chance in September, but as of last week they dropped the reins. Without a new shoe to drop, the buyers will set more records.
The news of the taper does not end the Federal Reserve’s Quantitative Easing. In fact, it guarantees it to go on until at least another eight months. Tapering is a process through which the Fed infuses less money into the economy. It does not mean that it is choking it — it is still buying but fewer assets. We are far from the central bank becoming an enemy to Wall Street. It has assured investors that it won’t break this bull market on purpose.
Within this setting, I present my three semiconductor stocks to buy under pressure:
Stocks to Buy: Micron (MU)
Despite my distaste for MU stock over the past two years, it’s my first pick today. Management has done a good job representing how well they’re doing. My beef with that is that it’s not that obvious from the actual financial reports. Nevertheless, it is doing well moving the business forward.
Fundamentally, MU stock presents a compelling bullish thesis. It has a low price-to-earnings ratio of 13x and a 3x price-to-sales ratio. Those are humble metrics that match the tepid growth from the profit and loss statement. Statistically speaking, there’s no reason for this 30% correction from its 2021 high. This is where the conversation gets a little bit more technical.
Micron stock topped in April 2021, just 50 cents away from its dot-com-bubble high. It was certain to find sellers lurking there. These are investors who have waited patiently for almost two decades to get out even. Moreover, machines who control most of the actions seek prior fails to sell. In short, the drop in MU stock does not change its long-term prospects. Therefore, buying the dip makes sense after this kind of movement.
Since the indices are near their all-time highs, it would make sense to take only partial positions. (That way, you leave room for error). Investors should have humble conviction levels, regardless of how confident they are. Remember — there are extrinsic factors to consider, so leaving room for error makes sense.
Lam Research (LRCX)
My second pick is Lam Research, and it has slightly more expensive financial metrics. Its P/E ratio is 80% more expensive than Micron’s P/E ratio. But in this case, perhaps you get what you pay for.
After all, LRCX stock also has a P/S ratio of 5.6x. This is a byproduct of it delivering better growth trends than Micron.
The stock is falling this morning on an estimate miss. In reality, Lam grew sales 35% over last year. I contend that the forecast was wrong and that they delivered strong absolute growth. The guidance was tepid and that’s what the headlines cared about today. This report card is a solid A, and there is nothing wrong with the operation.
I would rank this opportunity lower than MU because it is a smaller company. The perspective that I care about is the cash from operations. Microns is $12.5 billion, which is 3.5x that of Lam. This could become important if this global shortage persists. Having a better cash flow position would allow management to better navigate the treacherous waters.
LRCX stock, unlike MU stock, is nowhere near its dot-com levels. Even after this 20% correction, Lam Research is still up about 900% since then. I also suspect that there will be sellers lurking into $600 per share. There is support near $540, but if it fails, it will invite more momentum sellers. Eventually LRCX could end up at $490 per share. For this reason I like it a little bit less than Micron.
It would also be critical to not take a full-sized position. After all, smart money always leaves room in case a debacle unfolds.
Stocks to Buy: Western Digital (WDC)
My third pick today falls in between the first two. WDC stock is almost exactly where it was in 1997. Furthermore, this level has been pivotal in 2016 and in 2019. Clearly Wall Street has interest with the $50 level for Western Digital.
Its most recent correction from June is already 30%. But the stock is now falling into its 2021 base. This was the level from which WDC broke out in February. Therefore, I expect that there will be buyers down here. The upside expectations for the short term need to be realistic. Going into $60 per share, it will face sellers. In fact that zone could expand another $10 above that. Moreover, if it loses last week’s support, it could fall $5 from there.
Western Digital stock has already shed a lot of the froth. Therefore, it would make a good starter position for someone looking for a long-term investment.
Fundamentally, it is my least favorite of the three today. Its P/E ratio is almost double that of Micron’s and for no good reason. WDC also shows almost no growth over the last 7 years. MU, LRCX then WDC is how I rank the opportunity in the these three semiconductor stocks to buy this month.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.