The Tech Cold War Begins; Here’s How the Smart Money is Positioned in Semiconductors

Although many investors were expecting a resolution to the trade war between the United States and China just a few months ago, it now seems that the trade war between the U.S. and China could last for a while. While numerous sectors are affected by the trade war, it seems that the semiconductor sector is arguably one of the most affected. The U.S. has complained about China taking American hard earned intellectual property for a while, and President Trump has finally stepped up to plate and done something about it by imposing 25% tariffs on numerous Chinese imports and threatening to impose more tariffs on hundreds of billions more of Chinese imports. Moreover, Trump has targeted some of China’s crown jewel tech companies such ZTE and Huawei. As a result, it seems to some investors that the tech world might split into two, and some semiconductor names such as QUALCOMM, Incorporated (NASDAQ:QCOM)Intel Corporation (NASDAQ:INTC)Advanced Micro Devices, Inc. (NASDAQ:AMD)NVIDIA Corporation (NASDAQ:NVDA), and Synopsys, Inc. (NASDAQ:SNPS)
might be affected. In this article, let’s analyze how the smart money is positioned among the five stocks.

Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Shares of chip giants Intel Corporation (NASDAQ:INTC) and QUALCOMM, Incorporated (NASDAQ:QCOM) both fell by 3% and 6% on Monday after the two companies told their employees to not supply Chinese tech giant Huawei. President Trump blacklisted Huawei, the world’s second largest smartphone vendor, on Friday and has threatened to cut it off from U.S. semiconductors and software. President Trump is likely using Huawei as a bargaining chip to gain an advantage in the trade war with China. In any war there are some casualties, however, and given how big Huawei is in the smartphone space, Qualcomm, a smartphone chip play, would certainly seem more afflicted than Intel, which specializes more in desktop and server chips. Investors fear that the long term ramification of the trade war, which could cause China to produce its own chips. Given how hard it is to produce world class chips, it remains to be seen whether China can produce a competitive chip to supply its needs. Bulls of both companies hope that Huawei will just be a replay of ZTE, where Trump eventually relented on the harshest of penalties. If the trade war is settled, there is a probability that business can trend back to usual for Intel and Qualcomm in China.

Of the around 700-740 elite funds we track, 51 funds owned $2.27 billion of QUALCOMM, Incorporated (NASDAQ:QCOM) on December 31, versus 48 funds and $3.17 billion respectively on September 30. 65 top funds had a bullish position in Intel Corporation (NASDAQ:INTC) at the end of the fourth quarter, up 7 funds from the previous quarter.

While there are some losers in the semiconductor space due to the decision, Mitch Steves of RBC Capital Markets thinks that investors should consider to purchase three stocks, Advanced Micro Devices, Inc. (NYSE:AMD), NVIDIA Corporation (NASDAQ:NVDA) and Synopsys, Inc. (NASDAQ:SNPS). Steves thinks that investors can ‘hide in high-tech stocks’ such as AMD, NVDA and Synopsis due to their investments in deep learning and AI. Steves says, “You cannot do AI, you cannot do deep learning, you cannot do any high tech without those three companies”.

Of the around 700-740 elite funds we track, 28 funds owned $339.98 million of Advanced Micro Devices, Inc. (NYSE:AMD) on December 31, versus 28 funds and $600.37 million respectively on September 30. 41 top funds had a bullish position in NVIDIA Corporation (NASDAQ:NVDA) and 34 elite funds owned shares of Synopsys, Inc. (NASDAQ:SNPS)  at the end of December.