Will The Semiconductors And Homebuilders Repeat As Value Stock Champs In 2018?

Welcome to Episode #74 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

This is the last podcast of 2017. That means it’s a great time to look back at what worked, and what didn’t, this year.

And while growth stocks had a phenomenal year, it wasn’t all bad for value stocks either.

The Hottest Value Stocks of 2017

Two industries, the semiconductors and the homebuilders, had magical years and they also happened to be mostly value stocks throughout 2017.

The Semiconductor ETF SOXX has gained about 41% year-to-date while the SPDR Homebuilders ETF XHB is up roughly 30%. If you were in the iShares US Home Construction ETF ITB you’re up even more, gaining 56%.

Those are extraordinary gains in an extraordinary year for stock investors.

But what will happen to stocks in those two industries in 2018?

Are they still values? And can they keep the momentum?

The Homebuilders are Still out of Favor

The homebuilder stocks don’t get any love from mom and pop investors, even though they have soared in 2017. That’s a bullish sign for 2018.

Here are two homebuilder stocks that are still cheap and have attractive earnings growth.

1. DR Horton (NYSE:DHI) is up 85% year-to-date but still trade with a forward P/E of just 16. It’s one of the largest homebuilders, with a $19 billion market cap. Earnings estimates are on the rise over the last 2 months. Earnings are expected to grow 17.4% in fiscal 2018 and another 14.6% in fiscal 2019.

2. TRI Pointe Group (NYSE:TPH) united 6 home building brands after the housing bust to build homes in 8 states. It’s now one of the 10 largest homebuilders in America. Despite shares soaring over 55% on the year, TPH still trades with a forward P/E of just 13.5. It’s expected to have double digit earnings growth in 2018.

Is the Semiconductor Cycle Peaking?

No sector was hotter, in either growth or value, than the semiconductors in 2017.

But the question plaguing the industry heading into 2018 is if the cycle has peaked. Historically, when demand outstrips supply, the industry has ramped up production so much that it has brought down prices.

But Micron recently reported earnings and it said it still saw demand outstripping supply through 2018.

The semiconductors, despite their incredible gains in 2017, are still dirt cheap.

3 Semiconductor Stocks for 2018

1. Micron (NASDAQ:MU) reported another solid quarter in December 2017. Earnings are expected to rise 98% in fiscal 2018. With the sharp increase in the earnings estimates, it’s now trading with a forward P/E of just 4.3. Whoa.

2. Vishay Intertechnology (NYSE:VSH) is often overlooked by investors probably because its headquartered in Pennsylvania. Yet earnings are expected to rise 66% in 2017 and another 6% next year. It’s still cheap, with a PEG ratio of only 0.7.

3. Lam Research (NASDAQ:LRCX) is still expected to see earnings growth of 47% in fiscal 2018. Shares are still a value with a forward P/E of just 12.5 and a PEG of 0.9. Investors even get a 1% dividend yield.

Neither of these industries are showing the signs of being value traps. On the contrary. Both continue to see rising earnings estimates, not declining.

While it’s hard to buy in after a big run like they’ve had in 2017, the valuations are still attractive. Remember, to do your research before jumping into any stock.

What else should you know about these two hot industries?

Tune into this final Value Investor Podcast of 2017 to find out.

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