The behavior of semiconductor stocks is heavily correlated with the broader buying behavior of semiconductor manufacturers. Like most commodities, understanding the purchasing decisions of market participants is vital to anticipating market moves and profiting from them.
In the case of the semiconductor industry, seasonal cycles reflect the production ramp and build of semiconductor chips for device makers.
In the past, the cycle was dominated by trends in the PC industry. Today, it's becoming more influenced by mobile devices like smartphones and tablets. In both cases, the new model and volume sales cycle continues to revolve around the important fourth quarter holiday shopping season.
The production ramp to meet year-end holiday driven consumer buying has a dramatic impact on the performance of the semiconductor industry and the stocks within it.
I've been studying seasonality and the markets for the past decade, and the importance of having the right product at the right time remains paramount in just about every industry. In semiconductors, this means chip makers are buying equipment early in the year and ramping fabs to meet orders from OEMs into year end, resulting in sales bottoming in summer and peaking in winter.
Consider the following chart from my team at the Seasonal Investor, which shows the average book-to-bill for the SEMI equipment by month over the past decade. Orders are strongest early in the year as fabs prepare capacity for higher production.
Now consider this next chart, which shows Intel (INTC) and Taiwan Semiconductor (TSM) revenue per quarter. Sales peak into year end and typically flatten in summer before re-exerting into the end of the year.
The underlying shares of semiconductor companies behave similarly.
According to data from the Seasonal Investor database, the semiconductor basket (XSD) produces its highest average monthly returns in the period December through April.
The trend can also be viewed in looking at rolling three month seasonal performance of the XSD.
This first table shows the 3-month returns for the period beginning September and ending November. The XSD has gained in 3 of the 7 years since its inception.
This second table shows the returns for Q4. The XSD has finished higher in 5 of the past 7 years. While returns in the September to November period were down an average and median -3.8% and 0.49%m, respectively, they were up in Q4 by an average and median 0.12% and 4.12%, respectively. The standard deviation and correlation to the market is also less for the fourth quarter.
As you might imagine, since investors tend to move from one area to the next depending on sales, earnings, technicals or any other common form of analysis, they tend to avoid semiconductor stocks when orders are down exiting summer and embrace them when orders rebound in winter.
Of course, this raises another important question: which semiconductors should you be watching this fall? While the seasonal strength produces a larger number, I've broken out a group of widely traded and held semiconductors that are worth adding to your watch list.
The strongest of the group is ASML Holdings (ASML). I discussed how the move to smaller nanometer die sizes were positively impacts the stock here. Over the past decade, shares have finished the quarter higher 9 times, producing an impressive 18% median return for the period.
Other seasonally strong candidates include Applied Materials (AMAT), K L A Tencor (KLAC) and International Rectifier (IRF). Those three have finished higher in 8 of the past 10 years. It's probably not shocking - given the SEMI book-to-bill data I presented earlier in this article - to see 3 of the 4 stocks posting gains in at least 8 of the past 10 years are equipment stocks.
Given capital spending next year is likely to continue to benefit from the industry wide shift toward 14 nanometer chips, it would seem there's a nice catalyst justifying seasonality again this year. As a result, you may find it profit friendly not to ignore semiconductors through fall.
Source: Seasonal Investor Database