A global shortage of semiconductors is having negative ramifications on many industries.  Just this week Ford Motor Co. (F) warned that they could miss out on $1 billion to $2.5 billion in sales because of the chip deficit. However, this situation has been a boon to the semiconductor industry and many chip stocks. Through the first three months of the year, the PHLX Semiconductor Sector Index (SOX) was up 11.8%, compared to the S&P 500’s 5.8% gain.

The demand for chips was already high due to the rollout of 5G. Still, demand skyrocketed as millions of people were forced to stay at home due to the pandemic. Suddenly, sales of laptops and gaming consoles soared. And now that automobile manufacturers have reopened their plants, the demand for semiconductors has exploded with not enough chips to go around.

These shortages reflect a tight supply, but not a lack of demand, which means the chip rally should continue into summer. As the market has been retreating in recent days, it provides an opportunity to pick up chip stocks on the dip. That is why I am recommending two Buy-rated semiconductors that should see their shares rise in the months ahead: Intel Corp. (INTC - Get Rating) and Broadcom Inc. (AVGO - Get Rating).

Intel Corporation (INTC - Get Rating) 

INTC is one of the world’s largest chipmakers. It designs and manufactures microprocessors for the global personal computer and data center markets. The company has been gradually reducing its dependence on its PC-centric business and moving into data-centric businesses like artificial intelligence (AI) and autonomous driving.

Its data businesses accounted for almost half of all revenue in 2020. As more devices become interconnected, this bodes well for INTC’s prospects. Data centers that facilitate information stored and analyzed are mainly run with INTC server chips. But we can’t count out its PC business yet. INTC holds a dominant market share for microprocessors in the consumer and enterprise markets.

The company has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The POWR Ratings analyzes 118 different factors for every stock. These factors also contribute to 6 component grades. For instance, INTC has a Value Grade of A, which isn’t surprising as its stock looks undervalued based on multiple valuation ratios, including a forward P/E of only 14.22.

INTC also has a Quality Grade of A based on the strength of its balance sheet. As of its most recent quarter, the company had a whopping $24 billion in cash compared with only $2.5 billion in short-term obligations. We also grade INTC based on Growth, Momentum, Stability, and Sentiment. You can find those grades here. INTC is ranked #8 in the B-rated Semiconductor & Wireless Chip industry.

To see all of the POWR Ratings on INTC, Click Here

Broadcom Inc. (AVGO - Get Rating)

AVGO is a top designer, developer, and global supplier of an extensive range of semiconductor devices. The company was formed after the merger of Avago and Broadcom Corporation in 2016. Avago was focused on radio frequency filters and amplifiers used in high-end smartphones and legacy Broadcom targeted networking semiconductors and connectivity chips.

With a gross margin of 57.5%, AVGO is one of the most profitable semiconductor companies, which should continue to drive strong cash flow. The company is well-positioned to benefit from strength in its semiconductor and infrastructure software offerings that address the needs of growing technologies such as the Internet of Things (IoT) and 5G.

For instance, AVGO should benefit from content gains as more consumers upgrade to 5G devices. Plus, the company will take advantage of its networking chip expertise to grow revenue significantly in the years ahead. The stock has an overall grade of A, which is also a Strong Buy rating in our POWR Ratings system. AVGO has a Growth Grade of B, which makes sense as analysts forecast year-over-year earnings growth of over 20% in the current quarter and the next quarter.

The company also has a Quality Grade of B due to its healthy balance sheet. AVGO has a current ratio of 2.1, indicating it has more than enough liquidity to handle short-term obligations. For the rest of AVGO’s grades (Value, Momentum, Stability, and Sentiment), make sure to click here. AVGO is ranked #3 in the B-rated Semiconductor & Wireless Chip industry.

To see all of the POWR Ratings on AVGO, Click Here

INTC shares were trading at $62.47 per share on Thursday afternoon, down $1.23 (-1.93%). Year-to-date, INTC has gained 26.90%, versus a 10.82% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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