3 chip stocks that could short out

The sector has been on a tear, but selling pressure is mounting.

By InvestorPlace Jul 24, 2014 12:06PM

Image: Circuit Board © Datacraft Co Ltd, imagenavi, Getty ImagesBy Anthony Mirhaydari

One of the leading sector groups over the last few months has been semiconductor stocks.

Excitement over the "Internet of things" as well as indications that moribund PC sales seem to be stabilizing thanks to Microsoft's (MSFT) dropping of Windows XP support -- resulting in a forced upgrade cycle for many users -- have pushed the sector into a near-vertical trajectory since breaking out three months ago. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Since the beginning of May, the Market Vectors Semiconductors (SMH) is up more than 14 percent versus a 5.5 percent gain for the Standard & Poor's 500 Index ($INX).

But the sector has lost some momentum so far this month, with selling pressure intensifying as a surge of negative volume undercuts the sector's upward momentum. After such an exciting rise, there is evidence that a pullback looms.

For one, PC sales still stink: IDC estimates that worldwide PC shipments for the year will decline 6 percent from last year, which featured a 10 percent drop from 2012. Moreover, as quarterly results from Apple (AAPL) proved Tuesday night, the tablet market looks like it is getting saturated. IPad sales dropped 9.2 percent over last year. Research firm NPD said earlier this month that tablet shipments had dropped for the first time ever earlier this year (from 58.9 million in Q1 of 2013 to 56 million in Q1 of 2014).

In the context of all this, here are three semiconductor stocks that are looking vulnerable.

Freescale Semiconductor

Freescale Semiconductor (FSL) is at the forefront of the push into the Internet of things, specializing in the embedding of low-power microprocessors into automotive, consumer and industrial product applications.

However, FSL shares are suffering a pullback back below their 50-day moving average -- in the midst of a sideways trading range going back to February -- on reports that analysts at Needham downgraded the stock from a "strong buy" to a "hold." This follows a downgrade of FSL stock by analysts at IGI Group back on July 14.


Altera (ALTR) designs and makes custom programmable silicon, microprocessors and logic devices that are the basic building blocks of digital electronics.

Shares dropped hard Wednesday in response to poor earnings and guidance from a competitor on a slowdown in Chinese cellular infrastructure building, inventory accumulation, and a pause in defense sector orders. ALTR itself reports Thursday night, however, so caution here is advised.

Linear Technology

Linear Technology (LLTC) specializes in analog circuits, including signal conditional and radio frequency products used in stereo amplifiers, power-over-Ethernet and other applications. Its circuits appear in products for instrumentation, security monitoring, telecommunication, tablet/notebook and multimedia.

Shares dropped hard Wednesday, falling toward LLTC's 200-day moving average, despite the company reporting better-than-expected earnings on Tuesday. The bugaboo seems to be the inline guidance of revenue for the current quarter, which is disappointing investors.

More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

Jul 24, 2014 12:23PM
Does it surprise anyone that the Dow continues to stay positive while the whole world gets flushed down the toilet along with the vomit of control and manipulation?
Jul 24, 2014 12:23PM
... and in other news...

The Federal Reserve closed it's own doors today, citing an inability to function in the real world. Chair Janet Yellen pink-slipped everyone stating only-- "job not well done" as she placed her own slip in her right hand, delivered by her left hand. 
Wall Street pondered the news and as usual, translated it to mean buy more stocks until it was discovered that their funding source had been shuttered. "What will we do now..." was the question everyone was asking, and "how will I make all those luxury toy payments? What about all my off-shore gambits? Where will my Cocaine come from?"
The Public acknowledged the news by insisting all Fry Cook roles be blockaded. There was also quite a run on No Investors Allowed signs for dumpsters, homeless shelters and soup kitchens. "You've got degrees and talents, Wall Street... let's see if you can survive in a world of your own making now" said a guy with a tin cup as fixated texters passed by. 
"It looks grim" offered a Economist desperate for a new gravy train... "what about my dinner?" 
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