There could be some old school industrial names set to benefit from a semiconductor market recovery.
The chip sector is surging on Wednesday as a confluence of factors from a potential recovery in smartphone sales, analyst initiations, and warming trade talks encourage investors.
Yet the reach could be further than the traditional tech-focused semiconductor stocks such as Nvidia (NVDA) , Advanced Micro Devices (AMD) , Taiwan Semiconductor (TSM) , and Micron Technology (MU) . Possibly overlooked amid the action is the benefit available to traditional industrial companies like the newly spun off DowDuPont (DWDP) through its DuPont subsidiary, Illinois Tool Works (ITW) , 3M (MMM) , and Honeywell (HON) .
While those names might not be the first ones investors think of when interested in the high-tech space, the manufacturers are highly integrated into the supply of semiconductor materials and semiconductor packaging.
For reference on the size of the portfolios at these massive conglomerates, a February analyst presentation from DowDuPont noted that the DuPont subsidiary possesses "the largest portfolio of products in the semiconductor industry."
Illinois Tool Works, meanwhile, draws 15% of its revenue from electronic components and manufacturing that relies strongly on the semiconductor strength.
The connection to the space stung results onto the back half of the year for many of the more traditional industrial names.
"Advanced Materials sales were down 3% on an organic basis as continued strong demand and adoption of our Solstice line of low global-warming refrigerants, which was up 5%, was offset by declines in specialty products, particularly in our electronic materials business, which is in the semiconductor space," Honeywell CEO Darius Adamczyk told investors when reviewing fourth-quarter results in February.
Illinois Tool Works CEO Scott Santi noted the space's conservatism on 2019, declining to model in the turnaround that some companies had already begun to tout earlier this year.
"In the past, there have been talks about pause, and then a pick up again in the back end of 2019," he acknowledged in February. "And we've taken all that out and basically assumed current run rate based on what we saw in Q4 and, therefore in our view, appropriately, risk-adjusted for any exposure in semiconductors."
As such, any actual rebound to come would only serve to help revise upward past estimates for the dividend king.
While some investors were equally cautious on the major industrial names earlier this year, the call of a bottom by companies such as Lam Research (LRCX) actually should have served as a signal to buy the sector-exposed stocks.
Action Alerts PLUS portfolio manager Jim Cramer noted the correlation in February, advising Honeywell as a key pick if a bottom was truly placed in.
"If this rally in the semiconductor cohort is right, if it's accurately forecasting the future, then you want buy Honeywell," he said at the time. Honeywell stock has run double digits since that point, slightly edging even ITW's 10% gain.
The second signal that the second half is turnaround time could be an opportunity for investors too reticent to take advantage of the first sign.
To be sure, these companies remain subject to the inventory pressures that have created problems for the traditional semiconductor names in recent months, which poses cyclical risks if forecasts so far end up being overly bullish.
However, for investors looking for a more diversified strategy to play the likely inevitable long-term increase in demand for chips, it might not hurt to start with some of the hallmark companies of American manufacturing. The dividends don't hurt either.
(Lam Research, Honeywell, Nvidia and DowDuPont are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DWDP, NVDA, or LRCX? Learn more now.)
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