Semiconductors Winners And Losers At The Start Of H2 2022

If Q1 was a bad quarter for semiconductor stocks, then Q2 was every bit as bad, if not even more so. The decline that started in Q1 continued in Q2, putting semis in a big hole at the start of Q3. In addition, the existing trend favors additional losses in the second half of 2022. Moreover, the industry outlook has come under increased scrutiny with more companies issuing a downbeat forecast. Nevertheless, some semis are doing better than others, despite all the negativity. Those who are in it for the long haul may still want to be on the lookout for potential bargains amid the selloff. Why will be covered next.

The trend is down as losses mount

Semis are not the only sector having a hard time in 2022. Others are struggling as well, but semis have nonetheless underperformed in what was a difficult first half for stocks. For instance, the iShares PHLX Semiconductor ETF (SOXX) lost 35.5% in H1 after losing 12.7% in Q1. In comparison, the Invesco QQQ Trust (QQQ) lost 29.6% and the SPDR S&P 500 ETF (SPY) lost 20.6% in H1. The energy sector was the difference maker for the latter.

Losses increased gradually throughout the first half as shown in the chart above. In fact, a downward trend can be discerned by connecting the lows and the highs into a channel. June was an especially bad month for semis. On the other hand, stocks are getting close to oversold conditions, which favors a bounce, if only temporarily. Note how SOXX bounced whenever it came into contact with the lower trendline. The stock is now once again at the lower trendline. There are no guarantees, but a bounce in July after the major selloff in June would not be so unusual taking past history into account.

In addition, while many semis trended lower in H1, some got hit harder than others. To find out who they were, a look at each semiconductor stock in SOXX is necessary. The companies present in SOXX are Broadcom (AVGO), Intel (INTC), Nvidia (NVDA), Texas Instruments (TXN), Advanced Micro Devices (AMD), Qualcomm (QCOM), Microchip (MCHP), Marvell (MRVL), Micron (MU), Applied Materials (AMAT), Lam Research (LRCX), KLA Corp (KLAC), NXP Semiconductors (NXPI), Analog Devices (ADI), TSMC (TSM), ASML (ASML), ON Semiconductor (ON), Teradyne (TER), Skyworks (SWKS), Monolithic Power Systems (MPWR), Entegris (ENTG), Qorvo (QRVO), STMicroelectronics (STM), Wolfspeed (WOLF), Lattice Semiconductor (LSCC), MKS Instruments (MKSI), United Microelectronics Corporation (UMC), Synaptics (SYNA), Universal Display (OLED) and ASE Technology (ASX). The table below shows the gains or losses for each company.

Stock	Weight %	Change – 12 months	Change – 6 months	Change – 3 months	Change – 1 month	Change – YTD
AVGO	8.11%	+1.88%	-27.77%	-23.02%	-16.26%	-26.99%
INTC	8.06%	-33.36%	-27.82%	-27.26%	-15.78%	-27.36%
NVDA	7.99%	-24.21%	-49.47%	-45.25%	-18.81%	-48.46%
TXN	6.49%	-20.10%	-19.47%	-18.03%	-13.07%	-18.48%
AMD	5.75%	-18.59%	-48.42%	-35.86%	-24.93%	-46.86%
QCOM	4.36%	-10.63%	-31.40%	-16.36%	-10.81%	-30.15%
KLAC	4.22%	-1.58%	-26.66%	-14.64%	-12.54%	-25.81%
ADI	4.20%	-15.14%	-16.77%	-12.25%	-13.25%	-16.89%
LRCX	3.94%	-34.51%	-41.36%	-22.31%	-18.05%	-40.74%
TSM	3.86%	-31.97%	-32.67%	-23.40%	-14.22%	-32.05%
MCHP	3.84%	-22.43%	-34.18%	-23.97%	-20.06%	-33.29%
NXPI	3.79%	-28.04%	-35.78%	-20.98%	-21.99%	-35.01%
AMAT	3.76%	-36.11%	-43.48%	-33.00%	-22.43%	-42.18%
ASML	3.70%	-31.12%	-40.66%	-30.48%	-17.42%	-40.23%
MU	3.64%	-34.95%	-42.52%	-30.17%	-25.14%	-40.65%
MRVL	3.60%	-25.37%	-50.84%	-40.38%	-26.41%	-50.25%
ON	3.26%	+31.43%	-27.01%	-21.92%	-17.09%	-25.93%
MPWR	2.54%	+2.84%	-22.93%	-21.37%	-14.73%	-22.15%
SWKS	2.23%	-51.69%	-40.76%	-32.08%	-14.91%	-40.29%
TER	2.13%	-33.15%	-46.30%	-26.01%	-18.04%	-45.24%
ENTG	1.87%	-25.08%	-33.67%	-31.98%	-16.97%	-33.52%
QRVO	1.49%	-51.79%	-39.89%	-25.98%	-15.60%	-39.69%
STM	1.27%	-13.50%	-36.53%	-29.82%	-21.48%	-35.62%
WOLF	1.18%	-35.21%	-41.80%	-45.11%	-15.66%	-43.23%
LSCC	0.99%	-13.67%	-37.74%	-22.21%	-6.77%	-37.06%
MKSI	0.84%	-42.33%	-42.21%	-34.40%	-16.90%	-41.07%
UMC	0.75%	-28.36%	-42.14%	-27.83%	-23.16%	-42.14%
SYNA	0.70%	-24.12%	-59.64%	-43.99%	-20.30%	-59.22%
OLED	0.66%	-54.51%	-39.62%	-40.37%	-19.93%	-38.71%
ASX	0.50%	-35.78%	-33.80%	-28.69%	-27.69%	-33.80%
SOXX		-23.03%	-36.47%	-27.81%	-17.96%	-35.53%
QQQ		-20.92%	-30.20%	-23.65%	-9.08%	-29.55%
SPY		-11.87%	-20.99%	-17.76%	-8.64%	-20.57%

Source: iShares

Who did better and who did worse

Similar to SOXX, many on the list are in a downward trend, including such prominent names like NVDA, INTC and AMD. None of the 30 stocks in SOXX managed to stay out of the red in H1, but SYNA and MRVL topped the list with losses of more than 50% YTD, partially offset by big gains in the preceding six months. The stocks that are down the most in the last 12 months are OLED, QRVO and SWKS, all of whom have lost more than half of their value during this period.

At the other end of the spectrum, only three stocks still remain in positive territory after the last 12 months. They are AVGO, MPWR and ON in particular. ON has proven to be the most resilient stock of them all, being still up 31.4% after 12 months, even after losing 25.9% in H1. Note that ON was the top performer in 2021 with the exception of NVDA, the latter getting a boost from 2021 being a banner year for cryptocurrencies. In terms of YTD, ADI and TXN have the distinction of having lost the least with H2 upon us.

No stock seems to have any real momentum going into Q3, but if there’s one stock that came close, then it’s probably LSCC. LSCC outperformed by losing the least in June, although it still lost 6.8% in a difficult month. LSCC has also done better than most by falling 13.7% in the last 12 months. LSCC has gone sideways in the last couple of months, which is a positive sign considering the circumstances.

The outlook for the semiconductor industry continues to worsen

The poor performance by semis was to be expected in some ways. For instance, a previous article pointed out how semis had benefited from an environment that forced people into stocks, induced primarily by Fed policy. This environment was expected to become less favorable with the Fed about to tighten policy, creating a powerful headwind for semis in 2022. This thesis has played out in spades YTD.

The above thesis has been strengthened in recent months by geopolitical events in Eastern Europe. Not only did it turbocharge inflation, but it forces Fed policy to become even more restrictive, increasing the pressure on stocks and the economy as a whole. In addition, the combination of spiking inflation and a slowing economy seems to be having an impact on consumer spending.

Sales of such consumer goods like smartphones and PCs are going down. Just recently, MU became the latest to warn of weakening consumer demand when it issued downbeat guidance. MU also announced cuts to spending on manufacturing plants and equipment, which in turn spooked equipment suppliers like AMAT, LRCX, KLAC and ASML.

These views from MU are not inconsistent with what other companies have reported. Heavyweights like TSM and INTC have both reported weakness in certain market segments, especially those dealing with the consumer. However, there are other segments that are holding up better in comparison. Investors may want to take this into account when picking stocks.

Automotive-grade chips, for instance, are still in short supply, although probably not as much as before. Enterprise spending on such things as datacenters is holding up better in comparison to the consumer, but it’s possible companies will start cutting back in anticipation of a worsening economic environment, including a possible recession.

Investor takeaways

Semis have certainly seen a change in fortunes in the first six months of 2022 in terms of the stock market. Many semis rallied as they outperformed heading into 2022, but the sector now finds itself underperforming at the start of Q3, having accumulated big losses in H1. The headwinds that some thought would cause problems for semis have turned out to be every bit as potent.

Many semis are in a downtrend and that is likely to continue since the headwinds that have led semis to its current state are still around and unlikely to go away anytime soon. The central banks are not finished tightening policy and they may even have to step it up if inflation keeps rising. Geopolitical tensions have yet to recede and they could very well go higher. There are lots of headwinds and no remedy as of yet.

It’s true many semis are still reporting strong earnings growth, but the concern is that semis may already be past the peak in the current cycle. Downbeat forecasts like the recent one from MU only add to this perception. Many industry watchers have been looking for signs the cycle is turning and the semiconductor industry is heading for a downturn. While the industry may not be there yet, the growing perception is that it’s downhill for semis. The market seems to be leaning towards this view based on the price action this year.

There’s a saying that the trend is your friend and the trend suggests semis are heading lower. If you like to invest based on trends, then it’s clear what needs to be done and that is to bet on lower prices, especially when it comes to stocks in clearly defined downtrends like QRVO and SWKS to a lesser degree.

Having said that, trends do not last forever. Some may want to base their decisions on some other criteria. For instance, some may be more interested in the fundamental side of things and pick a name that stands to benefit from the industry heading into a certain direction. In this case, QCOM is one example of a way to play the global adoption of 5G networks. Advanced packaging is another industry trend and ASX may be worth considering.

Others may want to consider trading in pairs by going long the stronger of the two and short the weaker of the two. The thinking here is that the stronger of the two competitors will fall less than the weaker one if or when the market slides due to aforementioned reasons. INTC and AMD are two names that come to mind on this one.

Another group may be interested in names that are perceived to be trading at less than their fair value, especially with many down big in 2022. MU is a name that often pops up in this regard due to its relatively low multiples, although some may be wary of a name that is exposed to the memory market, which tends to get hit harder in a downturn. Other names like ASX and UMC are not only available at single-digit multiples, but they come with a dividend yield of 9-12%, which could come handy at a time when stocks gains are harder to come by. The dividend gives you the flexibility to wait and get through the lean times.

It’s true dividends can get cut, but the financials of UMC and ASX are such that they have enough wiggle room to keep paying the dividend, even if sales and earnings take a major hit. Both continue to post strong earnings growth despite the headwinds. UMC, in particular, has signed long-term agreements with its customers, which come with fixed commitments in terms of capacity and pricing. UMC has thus ensured that its new fabs will be fully loaded once they come online and it will not be left without customers all of a sudden, even in the event that the semiconductor industry goes into a downturn and companies have less of a need for foundries.

Bottom line, semis are most likely heading lower, temporary bounces notwithstanding. That has been the trend all year and there is very little to suggest that is about to change in the near future. However, some may want to use the opportunity to dollar average their way into certain stocks with an eye on the long run. The world still needs semiconductors after all. Nevertheless, the odds favor a continued slide in semis in H2. Investors should position themselves accordingly.