Shares of the Market Vectors Semiconductor ETF (SMH) are higher by over three percent today on volume that is already close to the daily average after Goldman Sachs issued a bullish research note on the semiconductor sub-sector this morning.
In the note entitled "The once every five years Semis matter," Goldman notes the Philadelphia Semiconductor Index "has significantly outperformed the S&P 500 on average only once every five years since 1995. We expect that 2013 will be the once in every five year period that semis matter for this cycle." Goldman's thesis centers around two key points: Lean supply coming out of 2012 and a favorable set-up for the group.
"We believe semi underperformance in 2012 (-8% vs. S&P) reflects cautious investor positioning, and short interest is now 19% above the 3-yr average. In addition, we believe Street estimates are achievable (2013 Street EPS has been revised down by 14% over the course of 2012, plus our 2013 EPS is 3% above the Street vs. 3% below on 1/1/12); and we see valuation as reasonable (semis trade at 12X norm. EPS, the lowest at the start of any year since we started to track this in 2005)," said Goldman in the note.
What is surprising about SMH's performance today is that Goldman rated Intel (INTC), the largest semiconductor maker, a Sell in the note. Intel, a Dow component, is by far SMH's largest holding with a weight of almost 19 percent. Adding to the surprise regarding SMH's bullishness today is that Taiwan Semiconductor (TSM), which accounts for 14.7 percent of SMH's weight, is hardly mentioned much in the note. In other words, SMH is rallying on the back of an analyst note that is bearish on one and not chatty about the other of the ETF's top-two holdings.
Keep in mind that SMH is home to just 26 stocks, so two stocks accounting for almost 34 percent of the fund's weight is significant. Goldman's top chip picks are NXP Semiconductors (NXPI) and Freescale Semiconductor (FSL), neither of which are held by SMH.
Goldman also has buy ratings on Avago Technologies (AVGO), Broadcom (BRCM), LSI (LSI), Aeroflex (ARX), M/A-Com Technology Solutions Holdings (MTSI) and Semtech (SMTC). Of that group, Avago and Broadcom combine for over seven percent of SMH's weight. Goldman reiterated a Sell rating on KLA-Tencor (KLAC), which has an allocation of 2.9 percent in SMH.
Assuming the Goldman chip call proves accurate, investors may want to consider the SPDR S&P Semiconductor ETF (XSD), which is up 3.6 percent today. XSD is more of an equal-weight play on the semiconductor sub-sector as no single stock receives an allocation of more than 2.86 percent in the ETF.
The names Goldman is least enthused about Intel, Intersil (ISIL), International Rectifier (IRF) and KLA-Tencor combine for about seven percent of SMH's weight. In fact, KLA-Tencor is not even a constituent in the $33 million ETF.
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