In what has been a fairly good year for stocks, a few industries stand out as laggards. Although technology has had a decent 2012, semiconductors are a notable exception, as the industry is only up about 3 to 6% for the year (depending upon the data provider). A number of factors have played in this weak performance. One of the biggest culprits, though, has been weak demand for computers and consumer electronics. Flagging or stagnant demand for telecom equipment has also played a major role, as have slowdowns in the automobile and industrial end-markets. Of course, the semiconductor industry in not a uniform bloc, and there are many stories worth further exploration.

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It's an Apple World ... or Is It?
Smartphones from Apple (Nasdaq:AAPL) and Samsung have been among the relatively few consumer electronic devices to see a continuing strong demand, but that demand hasn't translated into an automatic massive success for the chip suppliers.

Skyworks (Nasdaq:SWKS) and OmniVision (Nasdaq:OVTI) have both outdone the industry average, with gains of 22 and 13%, respectively. Likewise, Broadcom (Nasdaq:BRCM) and Qualcomm (Nasdaq:QCOM) have both delivered solid, albeit not spectacular, about 11% gains year to date. A host of other suppliers, though, have barely distinguished themselves from the larger industry, or have actually underperformed. Increasing competition has played a role in this mixed performance - as many companies have looked to the mobile device market as a solution to their revenue growth challenges, ASPs and margins have come under pressure.

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Can Intel Recapture Former Glories?
This has definitely been a challenging year for one-time industry giant Intel (Nasdaq:INTC). Shares are down about 16% for the year, and analysts expect the company to end the year with a modest year-on-year decline in net revenue. Intel's biggest problem is pretty straightforward - the computer industry that it dominates has seen sales fall off significantly, while its position in the faster-growing mobile device business is quite a bit more modest.

Intel is still talking a good game, though. The company has devoted considerable resources not only to new computer alternatives like ultrabooks, but also to chip architectures for the mobile market. At the same time, Intel arguably does not get enough credit for its efforts to expand into servers and data center equipment.

Will Analog Lead the Way Back?
Given their broad exposures to so many different end-markets, it may seem that analog chip companies should be among the laggards this year, but that has not been the case. Instead, companies like Analog Devices (NYSE:ADI), Linear Technology (Nasdaq:LLTC) and Maxim (Nasdaq:MXIM) have been able to maintain their uncommonly strong margins and returns on capital and deliver low-to-mid teens year-to-date gains in the market.

I suspect that it is the consistency of these companies' margins that has led their stocks to outperform. While revenue growth has trailed off on shorter lead times and lower orders, the companies have managed to maintain strong gross and operating margins, and continue to pay relatively strong dividends by industry standards.

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The Bottom Line
By and large, most analysts and industry executives expect 2013 to be a better year for the sector, but that was also the expectation going into 2012. A recovery in telecom equipment would certainly provide a boost, but the relatively dour outlooks for industrial, automobile and PC markets for the first half of 2013 could limit the near-term revenue rebound. With so many stocks trading below long-term fair value, though, patient investors may want to use this ongoing industry downturn as an opportunity to pick up a few bargains to ride through the eventual industry rebound.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.


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