Given the recent downturn in semiconductor stocks, Jefferies has identified three “top picks” in the sector to offer investors a buying opportunity. The chip industry has seen a significant sell-off since mid-July, which the investment bank says is largely due to sector rotation and exacerbated by fears of China-related restrictions and concerns about artificial intelligence demand. For example, the iShares Semiconductor ETF (SOXX) fell into a bear market last week, losing 25% from its July 10 high of $265.49, although it has since recouped some of its losses. The investment bank identified Dutch semiconductor tool maker ASML and European chip industry suppliers ASM and VAT as its top picks. All three large-cap stocks also trade in the U.S. “We see the bullish outlook for the sector and our top picks – ASML, ASM and VAT – completely unchanged over the past two weeks; the sell-off therefore represents a buying opportunity in our view,” Jefferies analysts led by Janardan Menon said in a note to clients on June 26. SOXX has fallen another 7% since the note was released. The analysts stressed that current market conditions should not be a cause for alarm but rather an opportunity for strategic investments as they expect semiconductor demand to gain momentum soon. “We expect semiconductor demand to accelerate over the next 6 to 12 months, led by increased demand for AI servers, iPhones, Android phones, general-purpose servers, AI PCs, consumer devices and (Internet of Things), with a subsequent recovery in industrial and automotive,” the analysts said. This forecast surge in demand is expected to have a positive impact on a broad range of companies within the semiconductor industry. Jefferies expects that “most semiconductor companies, including foundries, chipmakers and front-end equipment suppliers, will beat their expectations and even grow in the coming quarters.” The current downturn is not an unprecedented event in the cyclical semiconductor industry. Jefferies analysts pointed out that there have been similar declines in the past, such as a 12% drop in the SOX Semiconductor Index in April this year, followed by a 37% increase in the following three months. SOXX YTD line
