Fidelity Select Semiconductors Portfolio Outlook

Fidelity Select Semiconductors Portfolio is up over 6% in July and over 35% for the year. What is driving semiconductor stocks? How is Fidelity Select Semiconductors Portfolio positioned? Will the fund continue to lead the market?

Semiconductor stocks are among the top performers over the past 12 months.

They are up 14% as measured by advance of the Philadelphia Semiconductor Index (SOX). This compares with an 11% gain for the S&P 500.

Industry growth and merger activity have contributed to gains in semiconductor stocks.

According to the World Semiconductor Trade Statistics (WSTS), global semiconductor sales climbed to $27.6 billion in April 2015, up 4.8% year-over-year. This marked the 24th straight month of year-over-year growth.

Sales rose double-digits in the Americas region and China while they declined in Japan and Europe.

Semiconductor companies have been active on the deal front this year.

Fidelity Select Semiconductors Portfolio performance

Performance of Fidelity Select Semiconductors Portfolio

Source: Morningstar, AlphaProfit

Freescale Semiconductor (FSL) agreed to merge with NXP Semiconductors (NXPI) for $12 billion in March. The combined entity stands to become the market leader in automotive semiconductor solutions and general-purpose microcontroller products.

In May, Avago Technologies (AVGO) announced plans to buy Broadcom (BRCM) for $37 billion and create the top diversified communications semiconductor company.

Earlier this month, Intel (INTC) announced its biggest purchase ever. It agreed to acquire programmable logic device maker Altera (ALTR) for $17 billion to strengthen its server chip business.

For the 1-year period ending June 12, 2015, Fidelity Select Semiconductors Portfolio (FSELX) is up 22.4%. Market Vectors Semiconductor ETF (SMH), iShares PHLX Semiconductor ETF (SOXX), SPDR S&P Semiconductor ETF (XSD), and PowerShares Dynamic Semiconductor ETF (PSI) are up between 16.2% and 28.8%.

What’s Ahead for Fidelity Select Semiconductors Portfolio and Semiconductor ETFs

Deal activity is likely to continue in the semiconductor industry as forces driving consolidation persist. Chipmakers are seeking deals to gain scale, improve efficiency, and obtain new capability to offset anemic growth in traditional markets like PCs and Chinese infrastructure with higher growth in new areas like Internet of Things and connected cars.

Potential combinations can involve Qualcomm (QCOM), Texas Instruments (TXN), Micron Technology (MU), or Microchip (MCHP) buying Atmel (ATML), Inphi (IPHI), SanDisk (SNDK), or Cavium (CAVM).

While deal activity can perk up chipmaker shares in the near-term, industry growth is forecasted to slow.

The WSTS forecasts global chip sales to rise 3.4% to $347.2 billion in 2015 compared to growth of 9.9% and 4.8% recorded in 2014 and 2013. The 2015 forecast calls for sales to grow 3.7% in the Americas regions and decline in Europe and Japan.

Looking beyond 2015, the WSTS expects global semiconductor sales to grow 3.4% in 2016 and 3.0% in 2017.

While overall growth is tepid, companies in the right space can benefit from stronger tailwinds.

In the consumer space, increasing adoption of wearable devices, ultra HD televisions, and smart thermostats provide opportunities for analog and mixed-signal chipmakers.

In the industrial space, the automotive market appears particularly promising as semiconductor usage continues to increase for enabling advanced driver assistance, infotainment, and safety systems.

In sum, semiconductor stocks can provide a profitable ride for venturesome investors. The ride is however likely to be volatile with returns likely falling short of the 24% annualized rate semiconductor stocks have delivered since the March 9, 2009 market bottom.

Best Electronics Mutual Funds and Best Semiconductor ETFs

Investors seeking focused exposure to semiconductor stocks via low-cost mutual funds or ETFs can look to Fidelity Select Semiconductors Portfolio, Market Vectors Semiconductor ETF, iShares PHLX Semiconductor ETF, SPDR S&P Semiconductor ETF, and Powershares Dynamic Semiconductor ETF.

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