Looking at Semiconductor Stocks? 'Be a Stock Picker,' Trading Expert Says

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Semiconductor pricing is expected to rebound soon, but a worsening trade war could get in the way of that, making the sector a hotly debated one at present. 

Towards the end of 2018, analysts warned that chip companies had several oversupplied the market in the midst of an unexpectedly slower demand picture for the chips. Now, some analysts are looking for a pricing rebound, as most chip makers have worked down a significant portion of excess inventory. 

"Our updated (bottom-up) DRAM supply-demand model suggests a more balanced dynamic in 2020, followed by increased tightness in 2021," wrote Susquehanna Financial analyst Mehdi Hosseini in a note out last week. "This bodes well for memory manufacturers, particularly MU." Micron (MU) - Get Report derives roughly 65% of its revenue from DRAM sales. 

But "there is a major macro risk and they've really been front and center on a lot of these trade, a trade war developments," said Shawn Cruz, trading strategy manager at TD Ameritrade. Cruz isn't alone in pointing out this risk. Global Chief Investment Officer of UBS Wealth Management Mark Haefele recently downgraded his recommendation for an investors' position in tech stocks, as he believes the additional tariff threats set to go into effect in December  -- much of which are on on consumer electronics -- would put demand pressure on some chip companies. 

"You almost have to be a stock picker and the semiconductors right now because of the supply demand, a picture is clearing up for some companies more so than others," Cruz said. He noted one of the biggest secular trends positively impacting the chip sector is business' adoption of the cloud. As businesses adopt the cloud, chip makers with a heavy portion of their revenue and earnings from data center chips sales should grow well.

Nvidia (NVDA) - Get Report gets roughly one-third of its revenue from data center sales. Advanced Micro Devices (AMD) - Get Report also sees a high percentage of its revenue from data center sales. 

NVDA is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells NVDA? Learn more now.

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