'Absolutely unique': Fund manager names 2 stocks to play the semiconductor sector

Published Tue, Jan 17 202311:56 PM EST

Semiconductor stocks are looking up after a rough 2022. The iShares Semiconductor ETF is up 11% this year, in stark contrast to the index's 35.8% decline in 2022. The once-booming sector faced a downturn last year, in light of dwindling demand for consumer products such as smartphones and personal computers; supply chain disruptions; and a broad risk-off sentiment in the stock market. Now, however, investors appear to be heeding the advice of several Wall Street pros who have urged them to take a longer-term view on the sector , given the importance of chips in several key secular trends. Electric vehicles One such trend is the growing popularity of electric vehicles. Semiconductor chips are an important component of EVs, and it is for that reason that veteran fund manager Trent Masters is bullish on Arizona-based semiconductor supplier company ON Semiconductor . "65% of the business is focused on auto and industrial and while you do have that incredible volatility in the semi cycle, particularly around memory, you do have a lot of content gains running through the auto side that helps take the edge off that cycle," Masters, portfolio manager at Alphinity Investment Management, told CNBC Pro Talks last week. He added that the company will benefit from electronic content gains as consumers move from traditional internal combustion engine vehicles to EVs, as well as the move toward assisted and autonomous driving. Masters said a driver-assisted traditional vehicle has about $150 worth of electronic content, while a "Level 5" autonomous vehicle has about $1,600 worth of electronic content. "It's their content story that provides a degree of disconnect with the broader auto cycle and provides a degree of resilience in terms of the earnings. In terms of their execution so far, it has been flawless," he said. FactSet data shows more than 70% of analysts covering the stock giving it a "buy" rating, with average upside of 13.7%. An 'absolutely unique' business Masters is also a fan of Dutch chip firm ASML . "It's one of those very few businesses that is absolutely unique in terms of what it can do in advanced lithography, being able to sketch out those very leading-edge chips and allowing those chips to continue to get smaller," he said. The company sells $200 million extreme ultraviolet lithography machines , which are required to make the most advanced chips, to semiconductor manufacturers like Taiwan Semiconductor Manufacturing Company. As the only company in the world with the capability to produce such machines, ASML enjoys "very high" gross margins and an "incredible" market position, according to Masters. He described the company's supply chain management as exceptional, and while demand for semiconductor chips may remain volatile in the short term, he sees the business growing at a rate of 15% annually over the next three to five years. "We also have a very solid growth outlook all the way out to 2030 because they are working on the next advance in terms of their technology," Masters said. About 84% of analysts covering the stock rate it a buy, giving it average upside of 15.1%, according to FactSet data.