Chip Stocks Have a More Compelling Risk/Reward After Their Recent Tumble
Summary
With the coronavirus outbreak having done considerable near-term damage to both Chinese manufacturing activity and end-user demand, and with South Korea (home to Samsung, LG and SK Hynix, among others) now also reporting a sizeable number of cases, there are plenty of reasons to think that the next couple of months could be rough for chip developers, as well as the foundries and test/assembly firms relying on them. For his part, Tim Cook said on Thursday that the factories of Apples (AAPL) Chinese contract manufacturers are getting closer to normal production, after being shut down earlier in the month. Equipment makers such as Applied Materials (AMAT) , Lam Research (LRCX) and KLA (KLAC) (just to name a few of the bigger ones) have been slammed during the selloff, with many of them once again trading for 12 to 15 times forward EPS. Micron (MU) and Western Digital (WDC) , which are now trading for less than 10 times consensus EPS estimates for their 2021 fiscal years, are another place that bargain-hunting chip stock investors might want to look. Given both the near-term macro environment and how equity markets have been acting, its quite possible that the group sees additional selling pressure before the dust settles.