Don't look now, but the Philadelphia Semiconductor Index (SOX) is starting to show signs of life. Since Nov. 16, after a 15% pullback between September and October, it's gained 6.5%. After a 1.4% gain last week, the SOX is back above its 50-day simple moving average, meaning a trip to its 200-day SMA -- around 390 -- is now in play.
Last week, Broadcom (BRCM) fueled positive sentiment in the chip space after the company raised its fourth-quarter earnings guidance Thursday, citing upside in mobile and wireless. Investors also like news that it will supply sample chips to customers supporting long-term evolution (LTE), a wireless technology being adopted by wireless providers around the world.
It was a solid week of accumulation for Broadcom shares last week as the stock soared 5.7% in strong volume -- a sign that its move was driven by institutional buyers.
Broadcom, a bellwether in the industry, is still 14% under its 52-week high as it works on the right side of a base. But other names in the space are still in the early stages of growth and closer to highs, which means there's better potential here for outperformance in 2013.
ARM Holdings (ARMH) is currently extended in price, but it's one of the better-looking names in the chip space. It has a market capitalization of $16.7 billion, and it's liquid, with an average daily volume of 2.1 million shares. ARMH is a U.K.-based chip designer with a strong presence in the smartphone-and-tablet market. It licenses its technology to scads of large-cap tech names, including Apple (AAPL).
Investors cheered the company's latest earnings report after it said profit rose 29% from a year earlier to $0.18 a share. Sales growth accelerated sequentially, with a 24% climb to $233.5 million. Full-year earnings are seen rising 21% this year, with an expected 23% rise in 2013 against full-year 2012 estimates.
ARMH shares gapped up Oct. 23 on that news, but for investors who missed that breakout, there will most likely will be another chance to pick up this stock. Have patience for now, though, because the stock needs to consolidate gains for a bit before a new buy point can emerge. A logical support area for ARMH would be its 10-week moving average, currently around $32.75. The shares may not get down that far, but watch for tight weekly closes from here, with a hold underneath the recent $37.41 high. If this happens, a new upside breakout could take shape.
Meanwhile, shares of Cree (CREE) remain under accumulation -- something that not too many fellow chipmakers can say at the moment. This stock's resilience has been impressive, considering that Deutsche Bank recently downgraded it to hold from buy. Cree is also extended here, but should it undergo a low-volume pullback to its 10-week moving average around $29.75, this would be a logical area to start a small position.
The company makes light-emitting diode (LED), lighting and semiconductor products. Following a period of sluggish growth between fiscal 2010 and fiscal 2012, annual earnings growth is expected to ramp up nicely over the next two years. Fiscal 2013 earnings are seeing rising 26% (compared to 2012), with 2014 earnings anticipated up 39%.
Finally, Taiwan Semiconductor Manufacturing (TSM) continues to show relative strength. This is another chip name under accumulation, but after a recent technical breakout above $15.64, it's also extended in price. Its 10-week moving average around $16 looks like a solid support level.
Demand for the company's mobile integrated circuits remains strong. In Taiwan Semi's latest reported quarter, earnings jumped 68% from a year earlier to $0.32. Sales rose 38% to $4.8 billion
For the fourth quarter, the consensus estimate calls for earning of $0.27 a share, up 35% from a year ago, with sales seen up 28% to $4.4 billion.
Ken Shreve got his start in the financial markets with Investor's Business Daily (IBD). He spent over 10 years as an editor and columnist for IBD and its website, Investors.com. He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. He continues to provide market commentary on national radio and has appeared several times on CNBC. He now hosts the Breakout Investing podcast Monday through Friday from 3-4 PT on TFNN.