High Risk, High Yield

By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

After Donald Trump became President he told investors it was he who made the stock market rise. When the market went down, however, most blamed Trump again.

In 2018, the indices reached their highs and started correcting, which meant the ascending trend faded out and the market needed a new driver to start going up again. The US is taking on a new election in 2020, and until then Trump has to create that driver for the market in order to win it. And indeed, he does have a few silver bullets to support the national economy.

The Sino-US trade wars were unable to stop the market rise at once, but sped up the reach of the highs. With the ceasefire achieved, the market went positive, as the customs duties finally started spoiling companies’ earning reports.

The tech companies were the first to suffer. Thus, Apple reported iPhone sales declines, which according to Tim Cook, happened because of the trade war.

If the US-China relations improve in the nearest future, this will help the stock market to rise again – a good move for Donald Trump. While imposing duties was quite quick, lifting them will surely require a lot of time; this will push news on various agreements between the US and China into the market, and that will help  prices to start rallying again.

With the tech segment suffering most of all, it would be reasonable to assume its rising potential is also quite high.

Among the techs, Apple is of course in focus, as it’s a leading company here. Previously, iPhone sales decline could be explained with the trade wars, but now there’s also Qualcomm that, through legal actions, managed to ban selling iPhone products in China and Germany because of patent infringements. Apple, however, is still selling iPhones in China, even at risk that its representatives may get arrested. This is why Q1 report may fall behind the expectations, and the stock may get pushed down again. The price may fall to $140, and only positive news on Qualcomm claims may change the situation to the better.

Apart from Apple, the tech sector has a lot of companies, and each of them may react differently to the improving Sino-US relations. The corporations where most revenues come from China are first to win, of course.

One of such is Skyworks Solutions (NASDAQ: SWKS), which produces mobile network components. 83% of SWKS revenue comes from China. Its P/E is 9.70, while the average figure in the tech sector is 26.30, meaning Skyworks is very much underpriced. If the US and China come to an agreement, this company is very likely to increase its revenue and get investors’ attention. Ironically, the major risk is again Apple, as this company’s orders constitute around 40% of Skyworks revenue. If, however, Apple sales are able to start rising again, Skyworks will benefit from both factors.

Whenever the price breaks out of $70 and stays above, the price could rise further to $90.

Broadcom (NASDAQ: AVGO) has over 54% of the revenue coming from China. It is an integration microchip producer that is among top 20 semiconductor selling companies. It’s P/E is 12.60%, slightly higher than that of Skyworks Solutions, but still far behind the 26.30 average.

Broadcom also depends from Apple’s orders, but its share is just 20%, so the risks are lower. Still, a slight decline in revenues is expected in Q1.

Broadcom’s outlook is overall better than that of Skyworks. Technically, the price is above the 200-day SMA, and there’s an uptrend forming. When the entire market was falling at Xmas, Broadcom barely reacted, which signals the positive investor sentiment.

Once the price goes above $270, the stock may then rise to $300.

One of the most underpriced tech companies is Micron (NASDAQ: MU), another semiconductor producer that mainly makes RAM modules, SSD drives and CMOS detectors.

It’s ‘Chinese’ share is 51%, while the P/E is at 2.90, compared to 26.30 average. Over the last six months, the earnings reports showed the highest revenue, while the stock price was going down, just because of the RAM and flash drive supply and demand imbalance. The market is still oversupplied with these devices, and Micron is expected to lose revenues for the following two quarters as well. In Q4 2018, the earnings already fell by 6% QoQ.

Considering the above, Micron decided to increase its production by only 15% instead of 20%, as planned before, which will allow it to decrease the supply. Samsung is also planning to decrease its memory card production in order to slow down the price fall. By Q3 2019, the demand for memory devices is expected to rise again, and the price should recover.

The financial market is all about expectations, and, in this case, the decrease of memory devices demand is already priced, this is why Micron stock have fallen by 50% for the last six months. The current price may prove to be the best for going long.

When $34 got broken out, the volume increased sharply, which is the first sign of the reversal. The stock is currently trading above $36, and in case it stays there, it may go as high as $50 per share.

Each of the above companies is facing some issues, which are bound to get resolved sooner or later. Still, all of them have the same problem: the Sino-US trade war that prevents them for recovering and rising. Once the relations between the two countries get better, the game is sure to change a lot.

The key risk factor here is Donald Trump being very unpredictable. However, the potential yield is quite high, too.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Having majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.