The chip sector is coming to life after many names sold off hard in the latter part of 2018. Your stocks to watch this week are five hot chip stocks: AMD (AMD), Intel (INTC), Texas Instruments (TXN), Microchip Technology (MCHP) and Lam Research (LRCX). AMD stock, Intel stock, Texas Instruments stock, Microchip stock and Lam stock are all trading in buy range after recent breakouts. But some of the bases are very deep, and therefore risky.
Chip Stocks To Watch
Microchip leads this group of chip stocks to watch with a highest-possible IBD Composite Rating of 99. Intel stock follows close behind with a 98, while Texas Instruments stock earns a 95. Lam stock has a 92, while AMD has an 86. The Composite Rating looks at key fundamental and technical metrics like earnings growth, profit margins, return on equity and relative price performance.
While most of these stocks have high Composite Ratings, the chip sector warned about slower growth for the first half of the year. But from Broadcom (AVGO) to Micron (MU), the industry is very bullish about the second half of 2019. That outlook has helped lift chip stocks lately.
AMD stock is 3% above a cup-with-handle base with a 28.21 buy point. With a 53% decline from high to low, this is a very deep base. Our research shows that bases with a depth of 40% or more have a higher likelihood of failing. Even with an 8.5% gain in heavy volume the day shares broke out, AMD stock is still about 15% below its all-time high reached last September.
Like AMD, Microchip stock also has a deep base, at 42%. On Friday, shares cleared the cup-with-handle buy point of 91.92 with a 1.8% gain, but volume was lighter than average. Heavy volume is ideal for breakouts because that indicates support from institutional investors. Also, the relative strength line for Microchip stock is below where it was when it started to form the handle, even though shares are now trading at a higher price. That signals underperformance vs. the S&P 500.
The cup-with-handle base for Lam stock is deep as well, with shares selling off as much as 48% while forming the pattern. Lam stock is now 4% above the 188.06 buy point. The relative strength line is hitting its highest level in about nine months. Shares of the chip equipment maker are about 8% below their 52-week high. Lam stock has the weakest fundamentals in this group of stocks to watch, with declines on the top and bottom lines over the last two quarters. And the bleeding is expected to continue.
After initially struggling to hold above a 54.20 buy point from a cup-with-handle base, Intel stock is now trading 3% past the buy point. Though it fell back below that level, Intel stock never triggered a sell signal. The depth of Intel’s base is 26%, and the stock is now less than 4% below its 52-week high. But the chip giant has yet to surpass its all-time highs in 2000. Even though shares have surged some 360% since hitting a bottom in 2009, the relative strength line has more or less moved sideways over the last 10 years.
Texas Instruments Stock
Texas Instruments stock broke out above a handle buy point of 113.08 within a larger consolidation, and is now 0.5% above that level. Shares have been consolidating since January 2018, with Texas Instruments stock falling as much as 27% from its highs when it bottomed in December. The chip stock is now about 6% below its all-time highs.
Chip Stocks: Sector Rotation?
Different sectors can move in and out of favor, so investors should be aware of when the tide changes and a new group starts to show compelling action. Software stocks have been in focus for many investors, but the chip sector’s year-to-date performance now rivals that of the software sector. The semiconductor sector has risen 26.6% so far in 2019, while the software sector is up 25.4%.