The Foundry Quandary: Owning Semis Late in the Cycle

The semiconductor industry has long been a poster child of cyclicality.

Peter Nori

Peter NoriDirector of Global ResearchTempleton Global Equity Group

Preview

The semiconductor industry has long been a poster child of cyclicality.  Historically, industry revenues have been 90%+ correlated to global gross domestic product (GDP) growth.1 Why would value investors want to own these stocks late in the cycle? Now that the sun appears to be setting on one of the longest economic expansions in history, is this the time to be holding cyclical tech stocks that have outperformed the broader market since last year and trade near multi-year valuation highs? 

This may seem like foreign soil for value investors, but unfamiliar terrain can yield surprising discoveries. Closer examination suggests that the semiconductor industry is indeed home to a few unusual opportunities. It’s far from a broad sector play, but within the semis space we’ve found a handful of stocks that we believe offer superior quality and growth optionality at valuations that appear reasonable in the context of today’s policy and interest rate regime.

Download the PDF to continue reading the article.

ENDNOTES

  1. Source: SIA, Haver Analytics, Morgan Stanley Research, June 2019.


What Are the Risks?

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

The companies and case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the portfolio selection and research process. Factual statements are taken from sources considered reliable but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security. Past performance does not guarantee future results.