Daily Archives: December 4, 2017

Growth Stocks

5 Growth Stocks to Ride the Semiconductor Supercycle

It’s the silly season again on Wall Street. It’s the time of the year when analysts look ahead and tell us what they think.

Fortunately for you, it’s also the time of the year when major profit-making opportunities present themselves. Why? Because analysts from the major Wall Street firms are often 100% wrong. However, their pronouncements often will drive down the price of a stock or even a whole sector, creating that opportunity.

We saw a perfect example of that last week, when analysts from major firms including Morgan Stanley and JPMorgan among others downgraded the semiconductor sector. And of course, traders (or are they lemmings?) promptly dumped semiconductor stocks across the globe.

Semiconductor stocks were due for a pullback. Not only had they been the strongest sector in 2017, but the semiconductor index just recently passed a major milestone. The index just topped the record set in March 2000 at the height of the dot-com bubble. Experience tells me indexes often pause after attaining such a milestone.

Related: Buy These 3 Hot Semiconductor Stocks for Long-Term Profits

Semiconductor Supercycle

But let me get back to those Wall Street analysts. Many were basically saying, “Hey, the semiconductor cycle is over. Bad times are just around the corner.” And they are 100% wrong…

Because this cycle is different than the average cycle – we are in the midst of a supercycle that will go on for several years more.

I want you to think back to the commodity supercycle, which ran from 2000 to 2014. After the first few years, Wall Street analysts continued to proclaim that the cycle was over and that commodities and commodity stocks were due for a major tumble. But those analysts completely missed the fact that China was rapidly industrializing in a once-in-a-lifetime event.

Fast forward to today, and Wall Street analysts are missing the fact that products with semiconductors in them are becoming ubiquitous in every aspect of our lives. Artificial intelligence, Internet of Things, robotics, cloud computing, augmented reality, electric vehicles, and other technologies that will need lots of the latest generation of semiconductors are barely in the second inning of a very long ballgame.

Huge Growth Ahead

The growth the semiconductor industry is experiencing is clearly illustrated by a report issued on November 27 from World Semiconductor Trade Statistics (WSTS).

This year the market will reach $408.6 billion in valuation, a rise of 20.6% from 2016. That estimate is $30 billion larger than WSTS’s last report in June. This would be the first year of double-digit growth since 2010 for the industry and the first time ever sales exceeded $400 billion.

WSTS pointed to a number of factors for this growth including the spread of smartphones (and the constant replacement for upgrades), the growth in memory technology and the rise of video content. Memory chips, manufactured by the likes of Samsung and Micron Technology (NYSE: MU) now make up 30% of the semiconductor market and WSTS says this segment expanded by 60.1% in 2017.

It sees much more growth for this segment in particular thanks to the number of Internet-of-Things devices multiplying almost exponentially to more than 1 trillion units over the next few years. WSTS believes chip demand here will exceed even that from the 1.5 billion smartphones shipped annually. (Note: I explain much of this in my new Singularity report. If you’re not a regular Growth Stock Advisor reader then click here to check it out.)

Another demand driver, if you pardon the pun, will be our cars. They are rapidly turning into “data centers on wheels” according to the head of the automated-driving group at Intel (Nasdaq: INTC), Doug Davis in a story from the Nikkei Asian Review.

This growing demand may be lost on Wall Street analysts, but not by the chipmakers themselves. The research firm IC Insights sees $90.8 billion in capital investments this year, which is 35% more than in 2016: an obvious boost for chipmaking equipment sector.

5 Semiconductor Supercycle Investments

Here are five ways you can participate in the semiconductor supercycle:

The first and the broadest way you can invest in semiconductors is the MarketVectors Semiconductor ETF (NYSE: SMH). It owns 26 of the world’s top semiconductor-related companies such as Intel. The only major stock not in this portfolio is Samsung. This ETF has, of course, done very well for its holders. It has soared over 50% over the past year and is up about 42% year-to-date.

Second is the aforementioned Intel, the world’s biggest supplier of semiconductor products, which both designs and manufactures chips. The company is rapidly diversifying away from its PC-centered business. That was evidenced in its third quarter earnings report where results were pushed ahead by strong performances in its data center, Internet-of-Things and memory solutions groups.

Today, its chips can be found in iPhone modems, drones and self-driving cars. Its acquisition of Mobileye will significantly boost its presence in the autonomous vehicle market, accelerating Intel’s growth. Despite its move into growth areas, Intel’s stock still sells at a 15 p/e. The stock is up 21% year-to-date and 24% over the past 12 months.

Next on the list was the hottest stock in the market earlier this year, Nvidia (Nasdaq: NVDA). Its stock is still up 84% year-to-date and 108% over the past 52 weeks.

Founded in 1993, Nvidia like Intel, missed the entire mobile phone revolution. Its strength though, as always, has been in graphical processing units (GPUs), which run alongside CPUs. Gamers, such as those using the Switch console from Nintendo, love its GPUs. And, of course, its GPUs have been in the news a lot lately because of their popularity with the miners of cryptocurrencies like BitCoin.

I expect even faster growth for Nvidia as its processors become crucial to artificial intelligence, deep learning and driverless cars. As Goeff Blaber, an analyst at research firm CCS Insights said to the Financial Times, “Nvidia is at the center of AI, machine learning and deep learning.”

Next up is Broadcom (Nasdaq: AVGO), which is currently attempting to take over rival Qualcomm. Its stock is up 55% year-to-date and about the same amount over the past year.

The company’s origins date back to the 1960s at AT&T’s Bell Labs and also at Hewlett Packard. It supplies components to telecoms and industrial customers, which are used in items such as TV set-top boxes, smartphones, broadband infrastructure and energy systems. The company has particularly benefited this year from demand for its wireless solutions, but it is looking to the Internet-of-Things as a future driver of growth.

Finally, we come to Taiwan Semiconductor (NYSE: TSM), whose stock is up 37% year-to-date and about 33% over the last 12 months.

Apple (Nasdaq: AAPL) is believed to be designing its own power management chips for use in iPhones as early as next year. These new chips will be manufactured by Taiwan Semiconductor, the world’s largest contract chip manufacturer. It has been Apple’s sole supplier manufacturing chips for iPhones since 2016.

In 2016, Apple was the company’s number one customer, contributing 17% to its overall revenues. That contribution should be about 20% for 2017 and even higher in 2018, especially if it does begin to manufacture those power management chips. The growing relationship with Apple remains a big plus in Taiwan Semiconductor’s corner.

My bottom line message to you is to ignore the Wall Street lemmings and enjoy the semiconductor supercycle to its fullest.

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CEFs, Dividends

These 10%+ Dividends Will Get Chopped in 2018

I usually write about the beauty of closed-end funds (CEFs) and how we can tap them for yields of 7% or more while also beating the S&P 500 index.

Today I want to talk about the dogs of the CEF world.

And there are plenty of dogs to talk about—they’ll kill your returns while promising big income streams that aren’t what they seem.

It’s a shame, because a lot of these rotten CEFs attract first-level investors who don’t look beyond the dividend yield. As a result, these folks often get buyer’s remorse when they discover those big dividends were actually hiding a grim—and riskier—reality.

Below are 3 of the most dangerous dividends in the CEF space today. (And for the names of 5 more wobbly CEFs you need to stay away from in 2018, check out my new special report, “5 Toxic CEFs That Could Run Your Retirement.” I’ll give you a copy here.)

Dangerous CEF No. 1: An 11.7% Dividend on Borrowed Time

Let’s start with the Stone Harbor Emerging Markets Total Income Fund (EDI).

You might notice this fund now because it’s up 24.6% in 2017 alone—which makes it sound like a dream investment, especially when you add on the juicy 11.7% dividend.

But it’s just the opposite.

This year has been wonderful for emerging market funds, which is why my CEF Insider Foreign Sub-Index is up 22.2% in 2017:

Foreign Funds on Fire

There’s just one problem: go back further than the last year and you’ll see that EDI has performed really poorly. In fact, it’s up just 9.3% since its IPO, while the much better MS Emerging Markets Debt Fund (MSD) has gained 16.9% over the same period:

EDI Is No Winner

But the absent-minded market doesn’t care, since it’s priced EDI up to a 2.9% premium to its net asset value (NAV, or the value of the holdings in the fund’s portfolio), while MSD is priced at a whopping 10.5% discount to its NAV.

Why is the market overpricing the poorer-performing fund?

Simple: dividends. MSD’s yield is a “low” 5.7%, less than half of EDI’s 11.7%.

Trouble is, EDI is eating into its assets to maintain that payout, which is why its NAV is down a shocking 36.2% since its IPO. The lower that NAV goes, the harder it will be for the fund to maintain those payouts. That means a dividend cut is coming. And when it does, expect investors to flock for the exits, driving EDI’s price way down.

Which brings me to…

Dangerous CEF No. 2: A Pricey Fund Headed for Trouble

The Tortoise MLP Fund (NTG) trades at a 2.2% premium to NAV, even though it’s been delivering a crummy 1.2% annualized return since its IPO seven years ago.

And why is it being priced at a premium? You guessed it: dividends.

With a 10.2% yield, NTG is an income investor’s dream … on the surface. But like our first CEF dog, it isn’t earning its dividend from its investments, so it has to take money out of its assets to pay out that income stream to investors.

The result? A NAV chart that looks like the most dangerous ski slope in the world:

The Beginning of a Death Spiral

As with EDI, this decline in the fund’s NAV leaves it with less money to invest in the market. That, in turn, makes it harder to generate income to pay investors, and slowly twists the vice on its payout.

Since NTG has never cut its dividend—and has actually grown its payout several times—the inevitable dividend cut is going to shock NTG investors and cause panic selling. So don’t expect the premium to NAV the fund currently boasts to stick around for long.

Dangerous CEF No. 3: An 11.1% Payer With Built-in Losses

Another investor favorite that doesn’t deserve a place in anyone’s portfolio right now is the Miller/Howard High Income Equity Fund (HIE), which is also trading at a slight premium to its NAV (2.1% in this case).

This fund is a dog in so many ways, it’s hard to know where to start. But let’s go with the fact that its portfolio holds some awful assets that have done terribly in 2017, like Royal Dutch Shell (RDS.B), AT&T (T) and CenturyLink (CTL).

I also don’t like how the fund holds a bunch of business development companies, such as Ares Capital Corporation (ARCC) and Main Street Capital Corporation (MAIN), which means you’re paying fees to HIE to hold other investment companies that also charge fees to hold investments. Fees on fees are never good! That’s why the fund has done this since its IPO:

Fees on Fees Drag Down Returns

A bet on HIE is basically flushing money down the toilet. It’s down an average 4.3% per year since it started in 2014, yet the last two years (more than half the fund’s lifetime) have been stellar for the high-yield stocks HIE specializes in! Such underperformance is unacceptable.

Yet the market is pricing this fund at a premium. Why?

You guessed it again: dividends. This fund has an 11.1% dividend yield, and the income-starved hordes are overlooking its horrible track record and terrible portfolio because they crave that income. That makes HIE yet another fund to avoid.

Editor's Note: The stock market is way up – and that’s terrible news for us dividend investors. Yields haven’t been this low in decades! But there are still plenty of great opportunities to secure meaningful income if you know where to look. Brett Owens' latest report reveals how you can easily (and safely) rake in 8%+ dividends and never worry about drawing down your capital again. Click here for full details!

Source: Contrarian Outlook