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Since the market topped back in mid-September the Nasdaq has traded very poorly, falling more than 6 percent while the Dow Jones Industrial Average and the S&P 500 declined somewhat less.
But just looking at the averages’ performance isn’t enough — you have to look at why an average is underperforming.
Technology is one sector that has been under a lot of pressure. It’s been hit hard by weak trading in semiconductors. And as you can see in the chart below, semis have fallen more than 10 percent since mid-September, making it one of the worst performing sub-sectors in the market.
The reason for the underperformance: Semiconductor companies, such as Intel (INTC) and Advanced Micro-Devices (AMD), have been warning of lower profits for the foreseeable future.
Why the bleak forecasts?
Weak PC demand.
PC demand is falling sharply as tablets and advanced smart phones cut into the PC market. What’s more, PC sales have been slow because IT departments and other consumers have held off buying new machines waiting for Microsoft’s upgrade — Windows 8. The same thing happened earlier this summer when Apple reported earnings miss as consumers waited for the arrival of the iPhone 5.
It’s gotten so bad in the PC market that this weekend the cover story on Barron’s was “The Death of the PC.”
But as contrarians we have to …
Look Beyond the Obvious to Sniff out
Any Potential Investment Opportunities
As a rule, whenever a major publication like Barron’s declares something “dead” it’s worth a look from a contrarian perspective. So as I look across the semiconductor industry, I see some signs of hope …
First, the PC is not going away. And while tablets have certainly cut into demand, there will always be demand for PCs as tablets simply can’t replace many functions of a PC.
Second, given the terrible earnings results of many companies in the semiconductor industry and the gloomy outlooks, the case can be made that the worst-case scenario is already priced in. And from a valuation perspective, that makes a case for investing.
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| Once released, this latest version could fire up PC sales. |
Third, although waiting for the release of Windows 8 slowed PC demand, it should also cause an uptick in PC demand once the release is official and companies move to upgrade their computers.
Finally, the U.S. economy is showing some signs of life, as last week’s retail sales numbers beat expectations. And consumer credit figures and confidence measures show that the consumer is starting to feel a bit better about the economy, and is starting to spend some money again.
So if you like contrarian opportunities in beaten down sectors where pessimism reigns, semiconductors might be what you’re looking for.
To make a contrarian play on this sector, you could buy the Market Vectors Semiconductor ETF (SMH). It’s a good collection of semiconductor companies, including Intel, Texas Instruments, and Analog Devices, and should rally when the “semis” make a comeback.
Best,
Tom
P.S. Late last year, I released a special TARP report, “Government Bailout Contracts: THE Contrarian Investment for 2012.” Based on Monday’s close, my picks are up as much as 66.67 percent. And additional profits are sure to come!
To learn more about these little-known investments and how you can get your hands on my in-depth research with his latest recos, click here.
Tom Essaye oversees Weiss Group’s Million-Dollar Contrarian Portfolio, in which company founder Martin D. Weiss has staked $1 million of his own money.
Tom began his financial-services career at Merrill Lynch, where he worked on trading desks on the floor of the New York Stock Exchange. While on the floor, he managed multi-million dollar equity trades from some of the biggest hedge- and mutual-fund firms.
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A very good insight. However, is low PC demand the only reason causing the drop? As although there will be a decrease in PC chip market, the decrease is pretty small. “The worldwide chip market, which had been expected to grow by less than 3% for the year, is projected to decline by 0.1%” according to IHS. What do you think?