The 10 Worst Semiconductor Stocks of 2011

If your semiconductor stock showed huge gains in 2010, it probably showed equally huge losses in 2011. That's because it's been a miserable year for semiconductor investors, and for last year's highfliers. The cyclical industry is prone to swings and wild overcorrections in both positive and negative directions. Still, if you're a long-time veteran of the industry, it's been far worse: 2011 wasn't nearly as bad as late 2001, when semiconductor spending dipped more than 40% year-over-year. Nor was it as bad as early 2009, when year-over-year spending sank 30%.

Overall, semiconductor sales are expected to grow 1.3% this year, according to industry association WSTS. That'd mark the first time semiconductor sales surpass $300 billion annually, but it'd also represent a below-average growth rate. More importantly, it'd mean that semiconductor sales are the weakest of any technology subsector. Since technology in general underperformed other sectors this year, that's a recipe for steep losses.

And the steep losses rained down on the sector after a promising start to the year. The Philadelphia Semiconductor Index -- a rough proxy for the industry -- is off 11.9% on the year, far worse than the Nasdaq's 2.4% decline.

That led to a bevy of heavy losses across the industry. Here's a rundown of the 10 worst performers in the semiconductor industry, and a brief look at what's leading to their poor performance. Also, please note that I've excluded solar companies from this list.

Company

Market Cap (millions)

% Return in 2011

MIPS Technologies (Nasdaq: MIPS  ) 222.3 (72.3)
Cree (Nasdaq: CREE  ) 2,470.4 (67.5)
Rambus (Nasdaq: RMBS  ) 836.8 (62.8)
Spansion 485.1 (61.8)
TriQuint Semiconductor (Nasdaq: TQNT  ) 787.9 (59.5)
OmniVision Technologies (Nasdaq: OVTI  ) 706.9 (59.1)
Entropic Communications (Nasdaq: ENTR  ) 448.7 (57.2)
Skyworks Solutions (Nasdaq: SWKS  ) 3,002.5 (44.2)
Inphi Corp. 331.1 (40.6)
STMicroelectronics 5,145.8 (39.1)

Source: S&P Capital IQ. Results are adjusted for dividends.

A bad year in home entertainment
One incredible part of this list is that the two absolute best performers of 2010 both made the list of the worst performers. Those two companies are MIPS and Entropic. What caused the companies to fall off? Both were highfliers last year and promised heady growth into 2011, but that growth has fizzled out for both companies.

In MIPS' case, the company had hoped to expand out of its home entertainment stronghold into smartphones, but has failed to gain traction. In Entropic's case, year-over-year sales growth fell from 91% in the first quarter to -16% last quarter! Entropic has blamed headwinds such as a two-week strike at large customer Verizon, but the steepness of the fall-off indicates worse problems.

Cracks in the LED lights
For Cree investors, the lesson is simple: fear commoditization. The company simply lacks pricing power as more competition has come online this year. As a result, gross margins have fallen all the way from 47.1% at the end of last year down to 36.4%, while net income has taken a far worse tumble. The key lesson is that a massive growth field like LEDs isn't enough on its own; companies need advantages, whether it be patents, scale, or a deep technological lead, if they want to keep up high margins for the long run. Cree didn't have the right advantages, and is now suffering.

Fear and loathing in litigation
Speaking of patents, Rambus joined the list of losers in the field when it lost a case against Micron and Hynix. While Rambus has since inked a deal with Broadcom that restored some confidence in its ability to enforce its IP, Rambus' downfall was just one example of a year filled with patent mania.

Mobile growth ain't what it used to be
Finally, we see a trio of iPhone plays on the list. Both Skyworks and TriQuint make the underperformer list because of increasing price competition in the RF space. OmniVision's falling is more attributable to its placement in the iPhone. When the iPhone 4S came out, teardowns revealed the main camera sensor came from Sony. While OmniVision is believed to have kept the front-facing (and lower-quality) camera, investor confidence was shaken. OmniVision had long trumpeted its technological leadership in backside illuminated (BSI) technology, but Sony's win showed others have caught up. It's now up to OmniVision to wow the world with the release of its updated BSI-2 product line.

One more stock to consider
If you're hoping for quick salvation from the semiconductor industry, it probably won't come in 2012. Growth is expected to clock in at about 2.6%, once again well below other areas of technology.

If you're looking for another idea from a company with far greater growth prospects, The Motley Fool has created a brand-new free report: "The Motley Fool's Top Stock for 2012." It features a company hand-selected by the Fool's chief investment officer that has a strong future. I invite you to take a copy, free for a limited time. Get access to the report and find out the name of this legendary company.

Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of TriQuint Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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