Trading Nation

Chips are on the edge of a correction, but it could be the perfect time to buy


Trading Nation: Chip stocks enter correction

Chipmakers just fell into a correction and their tumble has market watchers split on whether the one-time favorites of the technology sector have any value left.

To Boris Schlossberg of BK Asset Management, the sector could be a strong buy after its swift decline.

"They got hit because of China concerns, obviously, and also because bitcoin has kind of fallen off the radar," Schlossberg, the firm's managing director of FX strategy, told CNBC's "Trading Nation" on Wednesday.

"But, I think when you look at the fundamentals, the business is supposed to increase by 8 percent this year which is a very healthy rise," he added.

Analysts on the Street put the group's growth prospects even higher. The U.S. semiconductor space is expected to post nearly 11 percent sales growth this year following a 17 percent increase in 2018, according to data compiled by FactSet. Earnings are forecast to rise by 23.5 percent.

"If SMH comes down to $100, I think it's going to be a very strong buy at that point," said Schlossberg.

The SMH VanEck Vectors Semiconductor ETF, an index of the 25 largest U.S.-listed chipmakers, has seen a sharp pullback this month. Its March drop puts it at $103.42 a share, roughly 3 percent above Schlossberg's buy target. The ETF has not dipped below $100 since the early February sell-offs that swept broader markets.

Chad Morganlander, portfolio manager at Washington Crossing Advisors, is not as bullish on the group's rebound.

"Let me be very clear here. They do have an exciting future, the exchange-traded fund, and as well, semiconductors. Unfortunately, it's fully reflected in the valuation of this group," Morganlander told "Trading Nation" on Wednesday.

The SMH currently trades at 23 times trailing earnings, slightly below the 23.6 times multiple on the Nasdaq. Individual sector names such as Nvidia and Texas Instruments trade at even higher multiples. The group's valuations shot up through February and early March after hitting a year-to-date bottom on Feb. 8.

"We will be fading this trade in the short run but also in the intermediate run," said Morganlander. "We would actually be avoiding this group."

The SMH bounced more than 1 percent higher in Thursday trading. It was hovering on the edge of correction territory, having fallen 9.7 percent from its 52-week high set March 13, days before the tech sector tanked. A drop of more than 10 percent indicates a correction.

The ETF is looking at a 3 percent loss to close out March, level with the decline seen on the .

Disclosure: Washington Crossing Advisors and Chad Morgandlander do not positions in the SMH.