Semiconductors

In the past 10 years, the fundamental shift from corporate IT to consumer demand is very important to consider when looking at the semiconductor industry. This has created a different playing field. There are more products that use semi components (MP3, cell phone, automobile, smart houses). Seasonal demand is now an issue, such as the Christmas and Chinese New Year. Finally the potential exists for more commoditized products and ASP erosion.

Firms that will out-perform in a slightly negative GDP environment include:

* Firms with the strongest balance sheets, such as Intel (INTC - Analyst Report)
* Companies that make specialized semiconductors (e.g. chips used in dentist X-rays)
* Firms that sell products that are technology driven rather than capacity driven
* Companies that are gaining market share because of superior technology, a la Varian (VSEA - Analyst Report)
* Firms that sell products associated with regulations such as power conservation

OPPORTUNITIES

Older technologies deliver power inefficiently, often consuming two or three times the amount of power needed by the end product and wasting substantial amounts of energy. Firms that provide solutions to so-called "energy vampires" will out perform.  Our favorite name in this arena is Power Integrations, Inc. (POWI - Analyst Report).

Solar power has seen double digit growth every year since 2004. Check out MEMC Electronic Materials, Inc. (WFR - Analyst Report).

Generically, the licensing business model has inherent advantages, such as a low overhead structure, limited capital investment requirements, very high margins and strong cash flows. On the flip side, this requires the maintainance of a technologically advanced IP portfolio and its protection from infringement, which could be very complex in a global economy with countries that don't recoginize or actively enforce IP rights. Investors may want to consider Tessera Technologies, Inc. (TSRA - Analyst Report).

WEAKNESSES

Firms that make technology that can be replicated by a chip fabrication plant or "fab." Photronics, Inc. (PLAB - Snapshot Report) is one firm we would wait to buy until we see evidence of their photomasks used in production at the more advanced geometries.