Semiconductor stocks have had it very easy for the last few years. Demand from cloud suppliers and device makers has been strong. New niches are opening in sensors and processors, adding intelligence to machines and factories. Militaries have also been focusing their purchases on technology.
But every boom must bust. There comes a time to take some money off the table. Now is such a time.
In looking for semiconductor stocks to dump I’m looking for companies that investors had overreached for, but where the final collapse has not yet come. I wouldn’t be selling Lumentum Holdings (NASDAQ:LITE) today because they just fell by one-third, transforming them from an expensive to a cheap stock after warning that a “major customer” (read Apple (NASDAQ:AAPL)) was reducing orders.
When the end comes, it comes just like that, so if you’re going to sell do it before the end. If you’re going to sell out a profitable position, do it today. Don’t wait. Put the cash in your pocket while it’s still on the table.
Following are some semiconductor stocks I think are overpriced and ripe for a fall.
Source: Matthew Rutledge via Flickr
Advanced Micro Devices (AMD)
Advanced Micro Devices (NASDAQ:AMD) hasn’t just been one of the great semiconductor stocks of the last few years, it’s been one of the great stocks, period. You could have gotten it for about $2 per share less than three years ago, and now it’s trading for around $19.50. If you’ve enjoyed the ride from the lows, it’s time to take some money off the table.
In the case of AMD, however, the hard fall has already happened. This stock was over $30 per share as recently as Sept. 25. It fell out of bed completely after earnings, released Oct. 25, missed estimates, and the company guided for even lower results in the fourth quarter.
AMD’s strength has been on the weakness in Intel (NASDAQ:INTC). The company bet the farm on new designs early in the decade, and it has paid off in strong sales of microprocessors and graphics processors. But AMD isn’t the market leader in either area. It’s always going to be second in processing chips to Intel because it doesn’t own its own foundry, having sold that off to Middle East interests as Global Foundries. It’s always going to be second in graphics because Nvidia (NASDAQ:NVDA) is just too strong.
Even at its present price, AMD is not cheap. The price-earnings ratio is 65. The company had just $1 billion in cash at the end of September to get through the next downturn, which now seems to be coming. Operating cash flow is notoriously weak, just $95 million during the most recent quarter.
AMD is a momentum stock. The momentum is gone. Drop it, let it fall, and see if it gets back up later. You don’t have a profit until you sell out and put that cash in the bank.
A year ago NXPI (NASDAQ:NXPI) looked like easy money among semiconductor stocks, now it looks like dead money. Qualcomm (NASDAQ:QCOM) had first proposed buying NXPI in 2016 for $110 per share in cash. Early this year, it raised that bid to $127.50. It was due to open for trade Nov. 13 at a little over $79 per share.
The idea was that NXPI’s smart controllers and power management chips could become the centerpiece of autonomous cars, which would broaden Qualcomm’s product line well beyond communications. The real reason for the bid, especially the raise, was that Broadcom (NASDAQ:AVGO) was trying to buy Qualcomm and Qualcomm was trying to make itself unpalatable.
NXPI itself had always been more a collection of parts than a coherent whole. It was born from the semiconductor unit of Koninklijke Philips N.V. (NYSE:PHG), the Dutch consumer electronics company, and later added the chip operations formerly known as Motorola, doing business as Freescale Semiconductor.
Broadcom was forced to drop its bid for Qualcomm, despite moving its main office to California, during the summer, as trade tensions increased. The Administration saw the Malaysian-run company as weak in the face of Chinese demands that it should “share” (give away) its trade secrets and designs. The deal, which seemed certain in June, collapsed in July, Qualcomm spitting NXPI out like a pit from a prune.
Since then, the delivery date for mass-producing self-driving cars has gone off into the future, and NXPI doesn’t have any firm commitments anyway. The company said in September it would hand out cash to shareholders but would not change its strategy. Its cash pile has been dwindling and fell below $2 billion by September. If the market does turn down it may be looking for a buyer again, but from a position of weakness rather than strength.s
NXPI needs a new strategy. It may be too late for you to get out with much of a profit, but at least you can get your money back. Find something better to do with it, and don’t go chasing the last dollar of profit on a deal stock. Sell before the deal gets done, when you still have a gain.
The latest tech wreck occurred because of fears iPhone sales were slowing and that its suppliers would be hurt. But Lumentum isn’t the only supplier of 3D sensing technology to Apple. II-VI (NASDAQ:IIVI), which is based far from Silicon Valley in Saxonburg, PA, northeast of Pittsburgh, makes what might be termed “non-Silicon” semiconductors from materials like zinc, cadmium, sulfur, selenium and tellurium. It was founded in 1971 by Dr. Carl Johnson, who retired in 2010, around cadmium-telluride, the same material used by First Solar (NASDAQ:FSLR) in solar panels.
You won’t find a lot of semiconductor plants around Saxonburg. The company planted its flag in Singapore over 20 years ago and has major operations in China and Vietnam.
The company is in the news today because it’s buying rival Finisar (NASDAQ:FNSR), which like II-VI makes components for Apple. The idea is that, combined, they can squeeze more profits out of those deals. Ask Qualcomm how that worked out.
Shares in II-VI fell on the Finisar news but looked to be recovering until Needham & Co. downgraded the stock, reducing their price target to $48 per share.
With excitement rising — the shares peaked in August but are still up over 250% from where they were five years ago — now might be the time to take some money off the table on II-VI.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.