Back in the fall of 2005, I began pondering where I might expect to make my money in 2006, and I came up with two ideas. One was bank stocks, but I don't think they're going to get going until mid-year. The other idea was semiconductors -- a sector that had a decent year in 2005 after a tough 2004.

Though I own only one semiconductor stock today, a few more have recently caught my eye. They include Genesis Microchip (NASDAQ:GNSS) as a play on LCD TVs, power player Microsemi, and overseas ideas like SiliconwarePrecision and Taiwan Semiconductor (NYSE:TSM) -- not to mention industry titan Intel (NASDAQ:INTC).

But today I'm focusing on Linear Technology (NASDAQ:LLTC), a leading company in high-performance analog semiconductors. The story here is definitely about the future, though -- at first glance, the present's not much to write home about. Fiscal second-quarter revenue rose just 6%, and net income was all but flat with the year-ago level due to the inclusion of stock option expenses.

Still, I think there are several positive aspects to this story. Orders are strengthening, and the company reported a positive book-to-bill ratio for the quarter (meaning that orders received in the quarter exceed the value of products sold). Gross margin is stable at a very high level, and operating income was down just 1% despite nearly $9 million in additional stock compensation expense.

While competition and eventual commoditization is always a concern, I think this market has some things working in its favor in that regard. Analog design requires a bit of "finesse," which puts a premium on recruiting (and retaining) top-flight talent. What's more, it takes a fair bit of R&D to stay in the game, not to mention a large catalog and customer base.

My biggest complaint about Linear today is that it's becoming a bank. The company generates prodigious cash flow, and though it recently hiked its dividend by 50%, it still has more than $1.8 billion in cash on the balance sheet (almost $6 per share) and no debt. That kind of cash can be more temptation than some executives can handle, and I have some concerns about whether it will best be used for (or by) the shareholders.

Prospective investors should be wary of competition, whether from old hands like Analog Devices (NYSE:ADI) and Maxim (NASDAQ:MXIM) or newer rivals like Intersil (NASDAQ:ISIL). Don't let the eventual talk about a new semiconductor cycle entice you into overpaying. Still, if you share my belief that the chips may be up in 2006, Linear is definitely worth a look.

For more fully coherent takes on semiconductors:

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).