The Year's Best Chip Stocks So Far

So far this year, the venerable S&P 500 stock market benchmark has backed down by more than 10%, and the tech-heavy Nasdaq has fallen about 6.7%. Both indices are also down over the past three months.

But plenty of semiconductor stocks are bucking that negative trend, to the point at which well-respected industry research house Gartner is flat-out surprised by the sector's strength in these uncertain economic times. Consumer confidence is down. Energy prices are up. Both corporate IT managers and the average Joe and Jane on the street should be spending less on gadgets and other high-tech hardware -- but they're not.

So which semiconductor stocks have ridden this stormy sea better than anyone else? We're not talking about the traditional giants here -- Texas Instruments (NYSE: TXN) has underperformed the market this year, for example.

Company	YTD Share Price Gain (%)	CAPS Rating (Out of 5)
IXYS (Nasdaq: IXYS)	69%	*****
Silicon Image (Nasdaq: SIMG)	58%	*****
Catalyst Semiconductor (Nasdaq: CATS)	61%	N/A
LSI (NYSE: LSI)	56%	***

Data from Motley Fool CAPS and from Yahoo! Finance as of 8/12.

Who are these guys?
Now, you can explain these shares' relative gains to some extent by looking at market timing -- early January was one of the lowest points in the year for all of them. But that proves only one thing: If you buy great companies when Mr. Market is pessimistic, you can make some great gains. When you get down to the brass tacks, these businesses have proved that they can survive the occasional marketwide scare.

Catalyst only recently passed the $100 million market-cap milestone to qualify for CAPS votes. So far, not a single Fool has sent in a ballot for this little maker of highly specialized computer-memory chips, though the company has been in business since the mid-1980s. The company works in a low-margin section of the chip market and recently pulled back to profitability and positive cash flows after a few rough quarters. And here's Catalyst's secret recipe for success in a national downturn: 92% of its sales came from abroad last year, with most of its customers working out of Taiwan, China, Singapore, and South Korea.

Silicon Image is bouncing off a five-year low that it set around the new year. These guys own intellectual property around the high-definition HDMI and DVI display standards, so they make a little more money every time another Blu-Ray player or plasma TV moves off a store shelf and into your living room. Fat gross margins and a rock-solid, debt-free balance sheet translate into generous free cash flows -- Silicon Image does a significant amount of IP licensing, after all. That's a very lucrative business to be in when the end product is hot, and high-def TV is most certainly on the hot list these days.

But wait! There's more!
That's just the short-short list of the very best performers. Many other semi stocks have also crushed the market recently, including five-star CAPS businesses such as communications-chip specialists Atheros Communications (Nasdaq: ATHR) and Broadcom (Nasdaq: BRCM) -- up around 12% and about 1% year to date, respectively, but both about 60% above yearly lows set in March.

So Gartner was surprised by the first half in semiconductors and cautiously notes that the second half should pull back a bit. Is Gartner setting its sights too low again? I think so. Many of these excellent businesses still look undervalued even if you feel iffy about the economy. Dive deep into the chip-biz expertise you'll find among your CAPS peers, and help us all separate the chaff from the wheat.

Further Foolishness:

• Atheros Beats Targets, Gets Stabbed
• 3 Stocks Hitting Low Notes
• 3 Stocks Hitting High Notes
• The Best Stocks for New Money