Even with surging demand for electronics, continued tight industry supply, and a slight pullback in late summer that slightly lowered chip stock valuations, there’s reason to be wary about semiconductor stocks, says Fidelity’s Jason Weiner.
“We’ve recently become more cautious and reduced the fund’s semiconductor holdings because we see fewer reasons to believe the industry’s excellent performance for much of 2021 will be repeated next year,” says Weiner, who, alongside Asher Anolic, co-manages Fidelity® Growth Discovery Fund (FDSVX).
The “go anywhere” fund invests mainly in large cap growth stocks the managers believe have above-average potential for earnings growth, led by industry leaders with proven track records.
The semiconductor industry boomed for much of 2020 and 2021 amid a worldwide chip shortage, strong orders for new laptops and routers, and the increased popularity of hyperscale data centers, Weiner contends. Meanwhile, the massive computing power required to fuel cryptocurrency mining and trading, and the ramp of 5G infrastructure and cell phones also spurred demand.
Continued tension between the United States and China likely played a role in jolting worldwide orders as well, Weiner contends, as some Chinese companies sought to stockpile chip supplies ahead of planned U.S. sanctions.
Weiner’s concern is that even if the demand drivers continue, the industry supply situation eventually will loosen. And investors likely will anticipate this shift, which is why he sees a less favorable mix of risk versus reward in the industry.
For this reason, Weiner has scaled back his semiconductor exposure in recent months, selling out of high-profile chipmaker NXP Semiconductors (NXPI) entirely. He’s also largely avoided semiconductor equipment names, although the fund continued to own ASML Holding (ASMLF) as of August 31.
Conversely, he’s slightly boosted the fund’s stakes in several software firms he thinks can benefit from continued economic expansion, including tax software provider Intuit.
“Strong enterprise application companies are still attractive because the best ones tend to enjoy product cycles that can fuel growth for years, and smart management teams are able to hunt down adjacencies that expand their market potential,” Weiner says.
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