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After Nvidia, Broadcom Breakouts, This IoT Chip Stock May Be Next

X The semiconductor industry has seen breakouts from Nvidia (NVDA), Broadcom (AVGO), Taiwan Semiconductor (TSM) and Microchip Technology (MCHP) in recent weeks, and Analog Devices (ADI) may soon follow suit.

In a clear sign of sector strength, nine chip stocks are currently on the IBD 50, including Taiwan Semiconductor, Nvidia, Cirrus Logic (CRUS), Applied Materials (AMAT) and 2016 IPO Ichor (ICHR).

While Analog Devices did not make the cut, it is coming off a solid quarterly report that showed a sharp rise in earnings growth from 2% to 68%. Sales gains also accelerated from 3% to 28%.

Analog Devices is set to report fiscal 2017 Q2 numbers on May 31, with consensus analyst estimates calling for a 31% rise in earnings per share.

Powering Self-Driving Cars

The Massachusetts-based company manufactures analog, digital and mixed signal integrated circuits for industrial, telecom, consumer and consumer markets, generating nearly $1 billion in sales during fiscal Q1, ended Jan. 28.

As a leader in Internet of Things technologies, Analog Devices is helping fuel the self-driving car revolution with its portfolio of Drive360 Autonomous Driving Solutions.

Analog Devices also pays a dividend currently yielding 2.2%, and holds the No. 4 position among semiconductor manufacturing stocks, with Macom Technology Solutions (MTSI), Taiwan Semiconductor, Microchip Technology and Skyworks Solutions (SWKS) rounding out the top five. The group itself ranks No. 21 among the 197 groups IBD tracks.

Manufacturing New Breakout?

The stock is currently working on a cup-shaped pattern as the fourth element of a first-stage base-on-base.

It's a classic example of how a stock can form steppingstones to a higher climb, with the low of one base finding support around the buy point of the prior consolidation.

Another positive technical indicator is how the shorter-term 10-day line is climbing back above the longer-term 50-day moving average. Also, the relative strength line has trending higher.

On Tuesday, the stock fell early but rebounded to close just slightly lower and near the top of the day's price range – a positive sign of support. Analog Digital posted another tight daily close Wednesday in quiet trade.

Two things to keep in mind as Analog Devices tries to close in on the 84.34 buy point: First, it can be risky to buy any stock right before it reports quarterly earnings. Second, chip stocks are cyclical and when institutional investors shift their attention elsewhere, industry leaders can head south quickly.

So keep an eye on Analog Devices, but also be sure to stay disciplined and use sound buy and sell rules.

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