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On Friday, I explained how a perfect storm led to the great semiconductor shortage of 2021.
It started with the COVID-19 shutdowns last year … accelerated with the trade spat between the U.S. and China … and then was punctuated by the worst drought in decades to hit Taiwan.
You don’t need to look far to see the results. Car lots are empty, and even Apple has warned investors that sales of iPhones and iPads could suffer this year due to the shortage.
It will resolve … eventually. Taiwan Semiconductor is investing $100 billion over the next three years to grow its production capacity. That’s billion … with a “b.” And its competitors are expanding capacity at a breakneck pace as well.
But in the meantime, chipmakers will be working around the clock to get chips out the door. With demand only growing and supply struggling to keep up, the next several years will be wildly profitable for the chip sector.
Semiconductor ETF X-Ray
Just for grins, let’s take a look under the hood at the VanEck Semiconductor ETF (Nasdaq: SMH). The VanEck ETF gives broad exposure to the major producers of chips and the equipment used to produce them and includes both American and international companies.
It’s been quite a ride. Shares of SMH dipped in March of last year, along with most of the rest of the market, but then exploded higher and haven’t looked back since. The shares are up about 132% from their March 2020 lows.
An exchange-traded fund (ETF) is only as good as the stocks it owns, of course, so let’s take a look at SMH’s major holdings.
Taiwan Semiconductor is the biggest component, making up about 14% of the portfolio’s assets under management (AUM). I highlighted Taiwan Semiconductor on Friday, noting it rated well on our quality, growth and volatility factors. But overall, it rates a neutral 54. We can do better than that.
Nvidia Corp. (Nasdaq: NVDA) makes up a sizable 10% of the ETF, and we’ve highlighted this stock before. Earlier this year, my colleague Matt Clark recommended NVDA as a “pick-and-shovel” play on Bitcoin and other cryptocurrencies, as Nvidia’s chips are a go-to for crypto miners.
Nvidia rates a “Bullish” 63 on our Green Zone Ratings system, and it rates a phenomenal 99 on our growth factor and a 98 on our quality factor.
It rates low on value (6), which pulls down its composite rating, but that’s pretty common. High-quality growth stocks aren’t often cheap!
The highest-rated semiconductor stock among the ETF’s core holdings is Dutch-based ASML Holdings NV (Nasdaq: ASML).
It rates a Bullish 76 with a 98 on our quality factor and an 89 in both momentum and volatility. Its 83 growth factor is solid as well.
ASML doesn’t manufacture chips. Instead, it manufactures the equipment that the chipmakers use.
I like that because it allows the company to benefit from the durable, long-term trend here without potentially getting whipped around by the effects of shorter-term demand swings.
ASML rates well on my system, and its shares should be strong performers going forward.
But in the September issue of Green Zone Fortunes, I recommend a stock that I like even better. Like ASML, it supplies equipment to the semiconductor makers. And the best part? Investors haven’t piled in and driven its value rating down like you see in the examples above.
Click here to join my Green Zone Fortunes readers today! You’ll find the details on my Millionaire Master Class and how I use the Momentum Principle to “buy high … sell higher.”
To good profits,
Chief investment strategist, Money & Markets