The 10 Worst Semiconductor Stocks of 2010

It's been a pretty kind year to stock investors, with the S&P showing a 12.8% gain in 2010. Of course, kindness might still feel relative after a decade of negative returns that included the nauseating depths and panic of the financial crisis.

Still, not every stock sees gains when a rising tide lifts all boats. Here's a list of this year's 10 worst performers in the semiconductor industry, which ignores companies that have gone bankrupt or sunk below $200 million in market capitalization.

Source: Capital IQ, a division of Standard & Poor's. Prices valid through Dec. 27. Only includes companies listed on U.S. exchanges that contain a market capitalization greater than $200 million.

Notice a trend at the top? A batch of solar stocks were absolutely crushed in 2010. All these losses came in spite of 2010 being a stronger year than expected for the solar industry. However, fears over sinking demand in 2011 continue to weigh down the industry.

Is this warranted? Comments from solar companies point to a market that's excessively bearish. To quote colleague Travis Hoium:

• At Sunpower the CEO Tom Werner says "demand is greater than the supply" and the North American commercial business is "70% booked for 2011."
• [In November] Suntech Power said analysis of customer demand saw "it was 30% above our ability to supply for the entire year."

Does all this optimism from within the industry make solar stocks a screaming buy? I wouldn't be so fast to rush in. First of all, those quotes come from the companies themselves, and as we're all well aware, companies tend to be overoptimistic about their own prospects. Another factor for smaller solar companies is increased competition. Take Energy Conversion Devices, which is seen in the list above. The company will face increased competition from large competitor Dow Chemical in the year ahead. Solar firms with poor fundamentals should continue to see strong headwinds in the coming year.

Shifting to the non-solar side, a couple themes emerge. The first is companies levered to PC demand. Both Micron and NVIDIA suffered throughout the year as fears that consumer spending shifting to converged devices such as smartphones and tablets would take sales away from the companies. Both Micron and NVIDIA have a toe in that market: NVIDIA has its Tegra mobile processor, and Micron produces the flash memory popular in mobile devices. However, sales of their legacy products that supply the PC industry far outweigh the current size of their mobile product lines. For example, flash memory accounted for only 28% of its memory sales last fiscal year.

The second non-solar theme involves companies that make media chips. Both Himax and Zoran made the list after sales continue to sag dramatically from results seen in 2007 and before. The culprit is sagging sales in large-screen televisions. After a boom last decade, demand for large-screen displays is faltering. Last quarter, Himax's large-display driver unit was down 48% from the previous year.

Can these semiconductor stocks continue their rebound in 2011? The news looks mixed. Last week, Micron reported some steep reduction in DRAM selling prices that could be bad for the future. However, the company's flash pricing held up reasonably well and the stock trades for just four times trailing and seven times forward earnings. In NVIDIA's case, the company's graphics processors have rebounded fairly well just in time for its mobile processor to finally begin gaining traction. Throw in the news NVIDIA is close to reaching a settlement with Intel over a long-standing chipset dispute, and NVIDIA's outlook has vastly improved since it hit rock bottom during the summer.

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