These Top Five Semiconductor Stocks Hold Surprisingly Low P/E Ratios

A handful of semiconductor stocks on the IBD 50 list have surprisingly low price-earnings ratios of 15 or lower. Investors consider low P/E stocks as cheap. Does that make them better choices?

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The P/E ratio is usually calculated by dividing a stock’s current price by the trailing 12 months of earnings per share.

IBD founder William O’Neil wrote in “How to Make Money in Stocks” that the P/E Ratio has little to do with whether a stock should be bought or sold. Most of history’s winning stocks had high P/E ratios when they started their big runs.

He believes investors should focus on the percentage increase in earnings per share instead of P/E ratios when looking for growth stocks. In fact, his research found that the metric is not a relevant factor in a stock’s success.

But P/E ratios can be lower in bear markets, and we have experienced a doozy of a bear. Or it could indicate suboptimal earnings.

Let’s take a look under the hood of five leading semiconductor stocks with P/E ratios ranging from 13 to 15. These stocks have gained 19% to 50% this year and are growing earnings.

Swiss Semiconductor Stock Hits All-Time High

Swiss company STMicroelectronics (STM) hit an all-time high Friday. The stock is in the 5% buy zone of a long cup-with-handle base, after a breakout followed by volatile trading in late March.

STMicroelectronics posted 61% Q4 quarterly earnings growth, down from 127% and 109% in the prior quarters.

Sales grew 24%, after 35% and 28% in the same time period. STM’s products include chips for analog, digital and mixed signal applications.

Its price-earnings ratio is 13, according to MarketSmith.

Lam Research (LRCX) is building the right side of a cup base and is nearing the 548.95 buy point. Shares are well below the 731.85 all-time high on Jan. 4, 2022.

Lam fits the bill for accelerating EPS growth, with a 26% increase in its most recent quarter, growing from 25% and 9% the previous quarters. Its P/E ratio is 14.

The relative strength line is at a new high as shown by the blue dot in MarketSmith pattern recognition. Lam supplies wafer fabrication equipment.

Microchip Technology (MCHP) is in a flat base with a 87.86 entry. The stock is about 7% off its all-time high of 90 on Dec. 28, 2021, after a long recovery.

MCHP posted decelerating quarterly growth from 38% to 36% to 30% in the last three quarters. Analysts forecast 14% EPS growth in the fiscal year ended in March 2023 and 8% in the next fiscal year. Its P/E ratio is 14.

Microchip designs and develops microcontroller and analog semiconductors.

Earnings Expected To Dip After Exceptional Years

Taiwan Semiconductor (TSM) is in a cup base with a 98.10 buy point.

TSMC delivered 61% quarterly EPS growth in its December ended quarter, following gains of 57% and 66% in the prior two quarters. For 2023, analysts expect EPS to decline 16% to $5.39 after an extraordinarily high $6.39 in 2022.

Lastly, ON Semiconductor (ON) is forming a new base with 87.65 buy point.

ON quarterly earnings are growing, but at a decelerating rate. For this year, analysts’ expected $4.40 EPS will pale in comparison to its record $5.33 EPS in 2022. ON’s P/E ratio is 15.

Follow Kimberley Koenig for more stock news on Twitter @IBD_KKoenig.

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