Yahoo Finance A New High for Nasdaq Overlooking Rate Hike Signal: 5 Picks
The Fed's recent signal of a sooner-than-expected hike in the benchmark interest rate failed to deter the Nasdaq Composite from attaining a new high on Jun 22. The teach-heavy index closed the day’s session at 14,253.27, marking a fresh closing high. In the intraday session, the index touched a new all-time high of 14,269.77. Notably, the index has joined the league with the Dow and the S&P 500, providing double-digit returns year to date.
In fact, surprising many market participants, the broad technology sector gained 2.2% from Jun16 (after Fed Chairman Jerome Powell's post FOMC statement) to Jun 22. A departure from the ongoing ultra-dovish monetary stance of the Fed is likely to affect growth stocks, especially the technology sector.
A systematic termination of bond buying will raise the yield of long-term government bonds, especially the 10-Year U.S. Treasury Note. Higher risk-free returns adversely impact the net present value of an investment in growth stocks like technology due to a higher discount rate. Furthermore, a hike in benchmark interest rate will affect growth stocks as these companies generally depend on easy access to cheap credit for their business expansion.
At this stage, a northward journey of the technology sector and a fresh all-time high of the tech-laden Nasdaq Composite look impressive.
Powell Sticks to Transitory Inflation Rhetoric
Despite raising its projection for the inflation rate in 2021, the Fed Chairman said in his post FOMC statement that inflation will cool down to a little over 2%, Fed's long-term inflation target, during 2022 and 2023.
On Jun 22, in his testimony before the House Select Subcommittee on the Coronavirus Crisis, Powell reiterated that inflation will be transitory as most of the recent price rise will not persist in the long term. He also expects the supply-chain disruptions and the labor-shortage problem to be solved to a great extent by this year-end.
Moreover, a recent report of The Wall Street Journal revealed that after adjusting for the base effect, inflation may not be as severe as reported by the government agencies. The recent spike in the last two month's inflation data may be due to the extremely low base of the pandemic-ridden 2020.
On Jun 10, the Department of Labor reported that the consumer price index (CPI) jumped 5% year over year in May, its highest since September 2008. Per the Wall Street Journal report, after adjusting for the base effect, the CPI rose much lower by 2.5% from the pre-pandemic level.
The yield on the benchmark 10-Year U.S. Treasury Note that started last week at around 1.45% jumped to 1.59% on Jun 16 after Powell's statement and reverted to around 1.468% on Jun 22. This is significantly lower than its recent high of 1.778% recorded on Mar 30. A lower yield on government bonds means lower risk-free returns that bode well for growth stocks like technology.
Budgetary Support
On Jun 8, in a majority voting, the U.S. Senate passed one of the largest bipartisan bill of committing around $250 billion in funding or scientific research, subsidies for chipmakers and robot makers, and an overhaul of the National Science Foundation.
The bill provides a package of $52 billion to boost semiconductor chip production and R&D activities over a period of five years. Notably, President Joe Biden also expressed his intention to provide a $50 billion budgetary support to accelerate semiconductor production and research.
Lawmakers are concerned that the United States had a 37% share of the global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12% as of now. Consequently, U.S. businesses, especially the auto and high-tech industries are suffering from an acute shortage of chipsets owing to the breakdown of the global supply chain during the pandemic.
Additionally, the Asian giant China is aggressively spending more than $150 billion to boost semiconductor manufacturing and unsettle the United States from its global leadership in this key technology. These show the urgency of the U.S. Congress to strengthen its high-tech semiconductor industry.
Our Top Picks
We have narrowed down our search to five Nasdaq Composite-listed semiconductor bigwigs with strong growth potential for 2021 and a solid long-term (3-5 years) growth rate. These stocks witnessed solid earnings estimate revisions within the last 30 days, reflecting robust business potential for the rest of 2021. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past month.
Image Source: Zacks Investment Research
NVIDIA Corp. NVDA has an expected earnings growth rate of 58.4% for the current year (ending January 2021). The company has a long-term growth rate of 17.6%. The Zacks Consensus Estimate for the current year improved 16.4% over the last 30 days.
NVIDIA is a cash-rich company with a strong balance sheet. As of May 2, 2021, the company had cash and cash equivalents of nearly $12.67 billion, which is significantly higher than its total debt of $5.96 billion. It boasts a sturdy cash-flow generating ability. The company’s accelerated revenue growth along with improving operating efficiency is bringing in higher cash flows.
Texas Instruments Inc. TXN has an expected earnings growth rate of 23.8% for the current year. The company has a long-term growth rate of 9.3%. The Zacks Consensus Estimate for the current year improved 0.4% over the last 30 days.
Texas Instruments is focused on the Internet of Things.Much of the recent growth in the embedded business comes from microcontrollers, which are some of the enabling products. Moreover, the company is seeing particular success in certain fast-growing segments of the automotive market.
Micron Technology Inc. MU has an expected earnings growth rate of 96.1% for the current year (ending August 2021). The company has a long-term growth rate of 15.7%. The Zacks Consensus Estimate for the current year has improved 1.3% over the last 30 days.
Micron is a cash-rich company with a strong balance sheet. As of Mar 4, 2021, the company had cash, marketable investments, and restricted cash of nearly $8.6 billion, which is significantly higher than its total debt of approximately $6.6 billion. Its focus on improving its cost structure and increasing the mix of high-value solutions in its portfolio is likely to boost margins.
Applied Materials Inc. AMAT has an expected earnings growth rate of 56.6% for the current year (ending October 2021). The company has a long-term growth rate of 18%. The Zacks Consensus Estimate for the current year has improved 1.2% over the last 30 days.
Applied Materials is a global leader in semiconductor equipment sales. The company is the number one equipment supplier to the global semiconductor industry. Moreover, its AI Design Forum bodes well for its strong focus on the development of new computing materials and designs.
Broadcom Inc. AVGO has an expected earnings growth rate of 24% for the current year (ending October 2021). The company has a long-term growth rate of 15%. The Zacks Consensus Estimate for the current year has improved 2.1% over the last 30 days.
The Internet of Things is creating newer avenues and is believed to be the next semiconductor growth opportunity with the potential for billions of connected devices. Broadcom’s strong relationships with leading OEMs across multiple target markets have helped it to gain key insights into the requirements of customers.
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