SunTrust Robinson Humphrey confirmed its positive outlook for the semiconductor sector and selected its top picks heading into second quarter earnings.
"We agree with the aggregate consensus estimates that suggest the semis/components industry will reflect peaking sales growth in CQ2, and fading but still positive growth later in the year," wrote chief analyst William Stein in Tuesday's note.
"While conventional wisdom suggests peak growth rates mark a downturn in semi stocks, we have demonstrated that semis tend to deliver significant returns in the two quarters after peak growth," he added.
Here are four of SunTrust Robinson Humphrey's favorite chip stock picks heading into second quarter earnings.
1) Analog Devices (ADI)
The analyst encouraged investors to buy Analog, including it as one of the industry's "best cyclical stock ideas." Analog's stock price was $81.09 at Monday's close, up 12 percent this year.
"We continue to see upside both from ADI's strong core positioning and incremental strength from its recent LLTC acquisition. Moreover, conservative guidance in its consumer end market should enable at least inline, perhaps better results. Faster than promised cost savings & revenue synergies will help guidance - if not in the CQ3 outlook, perhaps later."
2) Nvidia (NVDA)
Stein and his team recommend Nvidia as the "best structural stock," encouraging investors to buy one of Wall Street's hottest stocks this year. Over the past 12 months, Nvidia's price has surged over 210 percent to $164.25 at Monday's close.
"Despite the big run in NVIDIA's (NVDA, $164.25, Buy) shares in the last 1.5 years, we expect the stock will continue to outperform over the coming year owing to revenue & EPS upside potential across most segments (especially Datacenter for AI applications) and a sustained higher P/E owing to the scarcity premium for structural growth in large-cap semis."
3) Belden (BDC)
The SunTrust report calls Belden the "best positioned hold rated stock," suggesting that shareholders hold the equities in light of the company's recent acquisition of Thinklogical. The stock has grown only 1.4 percent year to date, underperforming the S&P 500. The stock closed on Monday at $75.82.
"We retain our Hold view on Belden (BDC, $75.82, Hold) but acknowledge that upside from the Thinklogical acquisition and recent debt refinance are collectively driving 50-60c of EPS accretion. While at least half may be "priced in", we anticipate the upward EPS revision will be constructive for the stock through earnings."
4) Broadcom (AVGO)
Stein included Broadcom in his stock picks, dubbing it a "poster-child" for semi industrialization. Broadcom is thrashing the market, up 40 percent year to date and closing on Monday at $249.02.
"This poster-child of our industrialization of semis theme continues to consolidate the still fragmented semi industry and uses scale to improve profits. Near-term anticipate upside owing to management's conservative guidance, BRCD consolidation, and related cost savings. Longer-term we continue to see the larger revenue base and 35% FCF margin as affording the company ample incremental acquisition opportunities."