The stock market has been rallying so far this year. After a forgettable 2018, which ended with a sharp double-digit decline, the S&P 500 has increased 12% since the start of 2019. Nevertheless, many stocks remain well off all-time highs and are sporting cheap valuations. Gun-shy because of last year’s ugly showing, many investors are still playing wait-and-see, holding shares back from an all-out rally.
Better times ahead for chips?
Nicholas Rossolillo (ON Semiconductor): Clouds of uncertainty have gathered around technology manufacturers, especially chipmakers, in the last year. A trade war between the U.S. and China has bogged down investor sentiment as much of the manufacturing process takes place across the Pacific. A global economic slowdown hasn’t helped, either. Semiconductors are a cyclical business, prone to ebbs and flows in end-customer spending.
ON Semiconductor hasn’t been immune. Though sales and adjusted earnings increased 6% and 34%, respectively, in 2018, the stock fell 21% on the year because of a sharp slowdown compared to 2017 — one that is expected to persist through the first half of 2019. However, the outlook later this year looks much better, with ON’s management reporting strength from automakers, industrial equipment, telecom, and data center customers.
Longer term, demand for the sensors, power management, and connectivity chips ON makes should only increase as the world goes digital and mobile networks grow in importance. Thus, this stock looks mighty cheap at the moment. Trailing-12-month price to free cash flow sits at just 12.1, and forward price to earnings based on expected profits is even lower at 11.3 as ON’s profit margins on new product sold continues to rise.
Thus, the shortsighted worry over trade wars and an economic downturn — in spite of ON Semiconductor’s optimism that growth will resume in the near future — means this stock is worthy of consideration right now.
A potential winner from an inverting yield curve
Chuck Saletta (Lennar): Bonds recently sent shockwaves through the overall financial market when the yield curve inverted. Inverted yield curves happen when longer term interest rates are lower than short-term interest rates, and they’re often thought of as harbingers of recessions. But they’re not perfect predictors. Indeed, a recent Forbes column concluded that the inverted curve indicates a 25% to 30% chance of a recession sometime in the next six to 18 months.
In other words, the stock market dropped because…
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