Last week, one of my favorite sectors sank nearly 10%.

I’m talking about semiconductors—the “brains” inside electronic devices. And earlier this month, semiconductor companies plummeted… on no real news.

But that’s a good thing for us.

Sometimes Wall Street acts irrationally and sells off good businesses. That gives us an opportunity to buy a booming industry at a great price.

As I told you back in October, the semiconductor industry is about to take off. Regular readers may recall that they make the microchips that go inside smart devices.

And according to market forecasts, 75 billion new smart devices will be manufactured over the next eight years. This is going to be huge.

Here at the Daily, we show you the big trends that can boost your portfolio. And few trends will be bigger than the growth of smart devices.

Today, Wall Street’s miscalculation just handed us a chance to get in even more cheaply…

Wall Street Overreacts

As you can see in the chart below, semiconductors have crashed 9% since November.

The media blamed a report from investment bank Morgan Stanley for the pullback.

The report said semiconductor companies had produced way too much product. Wall Street feared the supply glut would cause sales to slow… and profits to fall.

This is not news. I’ve been reading about a potential supply glut for months… It’s not going to happen.

Let’s be clear… This was just a normal pullback. Pure and simple. On average, the market pulls back 10% or more about once a year.

In fact, it’s healthy for a bull market to pull back 10%. It shakes out all the weak hands and allows the rally to keep going. And that gives you a chance to get quality companies at cheaper prices.

Buy the Trend

As I said above, 75 billion new smart devices are going to come on the market over the next decade.

That’s 16 times greater than the total number of computers manufactured—ever. It’s almost 40 times more than total number of smartphones manufactured.

Each and every one of these smart devices will need microchips. From thermostats and refrigerators… to smartphones and bitcoin mining equipment.

Computers and smartphones have been two of the most profitable trends for investors over the past 40 years.

The smart device trend will dwarf that.

And we’re not the only ones excited about semiconductors…

Follow the Smart Money

Last quarter, renowned investor Joel Greenblatt added several semiconductor companies to his portfolios.

Greenblatt may not be a household name, but he had one of the most remarkable runs in hedge fund history.

From 1985–2006, his fund, Gotham Capital, returned an annualized 40% gain during the period. That’s enough to turn a $10,000 investment into $8.6 million.

You’d be hard-pressed to find any other fund with that kind of run over a 21-year period.

And now, one of the best stock pickers of all time is adding chipmakers to his portfolio.

Two of his top three biggest position increases were semiconductor stocks: Micron and ON Semiconductors.

It’s not like we’re following Greenblatt, though.

We pegged these two companies as good buys back on October 4. The list below is what we ran on that day.

Company

Ticker

Forward P/E Ratio

Growth Rate

Lam Research

LRCX

16.6

25%

Micron

MU

7.4

10%

Applied Materials

AMAT

14.4

16%

MACOM Technology Solutions

MTSI

17.9

20%

Broadcom

AVGO

14.9

15%

Cypress Semiconductor

CY

17.5

22%

ON Semiconductors

ON

12.8

25%

Microsemi Corp.

MSCC

13.1

13%

S&P 500 Index

 

19.4

2%

Since then, both companies are up an average of 5%. But it’s been a wild ride.

But after going up an average of 20%, both gave up those gains over the past couple of weeks.

However, both companies appear to have found support at their current levels and look poised to rally higher again. Nothing has changed.

These companies are still cheap and growing quickly.

Look, markets don’t go straight up. Inevitably, there will be dips. You just need to turn them to your advantage.

If you want to invest in semiconductor companies, you can follow Joel Greenblatt into Micron and ON Semiconductors. Following smart guys is a great strategy.

But if you just want broad exposure to the overall industry, consider the VanEck Vectors Semiconductor ETF (SMH).

This is a trend we will be following very closely here at the Daily.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

IN CASE YOU MISSED IT…

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