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Why You Should Buy Beaten-Down Chip ETFs Ahead of Q3 Earnings

Sweta Killa
Updated
JMP Group LLC (JMP) could be a stock to avoid from a technical perspective, as the firm is seeing unfavorable trends on the moving average crossover front

Semiconductors were under pressure in the third quarter given the waning demand for memory chips and escalation in trade tensions between the United States and China. As a result, iShares PHLX Semiconductor ETF SOXX, VanEck Vectors Semiconductor ETF SMH and PowerShares Dynamic Semiconductors Fund PSI have lost 9.5%, 10.9% and 13.8%, respectively, in the past three months (read: Semiconductor ETFs in Trouble?).  

The weakness might continue this earnings season, given a few expected positive earnings surprises and little or no positive estimate revisions.

Some well-known players in the space like Texas Instruments TXN, Qualcomm QCOM, Intel INTC, NVIDIA NVDA and Applied Materials AMAT are expected to report this week and in the coming weeks. Let’s delve into the earnings picture of these companies that have a higher allocation in the abovementioned ETFs and the power to move the funds up or down as Q3 earnings unfold. SOXX is largely concentrated on the five firms, with a combined share of 36.8%, followed by 33.1% for SMH and 26.6% for PSI.

According to the our methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases our chances of predicting an earnings beat, while a Zacks Rank #4 or 5 (Sell rated) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Inside Our Earnings Prediction

Texas Instruments is set to report on Oct 23, after market close. It has a Zacks Rank #4 and an Earnings ESP of -0.28%. The earnings estimate for the yet-to-be-reported quarter has been steady in the past 30 days. The earnings surprise track over the past four quarters is good, with an average beat of 5.38%. The stock has a VGM Score of A (see: all the Technology ETFs here).

Intel is slated to release earnings after market close on Jul 26. It has a Zacks Rank #3 and an Earnings ESP of +0.20%, indicating a reasonable chance of beating estimates this quarter. The stock saw no earnings estimate revision by over the past 30 days for the to-be-reported quarter and delivered a positive earnings surprise of 19.86% on average over the last four quarters. It has a VGM Score of A.

Qualcomm has a Zacks Rank #3 and an Earnings ESP of -0.15%, indicating lower chances of beating estimates this quarter. The Zacks Consensus Estimate for third-quarter 2018 has been constant at 82 cents over the past month. The stock delivered a positive surprise of 19.75% in the last four quarters. It has a VGM Score of C. The company is expected to report results after the closing bell on Nov 7.

NVIDIA, expected to report on Nov 15 after the closing bell, has a Zacks Rank #3 and an Earnings ESP of -0.50%, indicating a lower chances of beating estimates this quarter. The company delivered positive earnings surprises in the last four quarters, with an average beat of 29.86% and saw no earnings estimate revision over the past month for the to-be-reported quarter. The stock has a VGM Score of C.

Applied Materials has a Zacks Rank #4 and an Earnings ESP of -0.21%. Its earnings surprise track over the past four quarters is good, with an average beat of 5.72%. The stock witnessed no earnings estimate revision over the past 30 days for the to-be-reported quarter. The company has a VGM Score of A and is slated to report on Nov 15 (read: ETF & Stock Picks to Defy Subdued September US Retail Sales).

Conclusion

As most of the companies in the space are less likely to beat on earnings, semiconductor ETFs might continue to trade sluggishly in the weeks ahead. Further, all these ETFs have a Zacks ETF Rank #3, suggesting that investors might adopt a wait-and-see approach.

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QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
 
ISHARS-PHLX SEM (SOXX): ETF Research Reports
 
VANECK-SEMICON (SMH): ETF Research Reports
 
PWRSH-DYN SEMI (PSI): ETF Research Reports
 
Intel Corporation (INTC) : Free Stock Analysis Report
 
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
 
Texas Instruments Incorporated (TXN) : Free Stock Analysis Report
 
Applied Materials, Inc. (AMAT) : Free Stock Analysis Report
 
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