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Semiconductor Conundrum

By Rick Walter

Last weekend I worked on a new semiconductor portfolio because I thought that although the price to earnings ratio of many of the companies in the industry are still too high (P/E's of companies in this industry typically runs very high), there still may be an opportunity to take a position in the industry and make some money. Although knowing what companies to buy in this industry may be the ultimate conundrum.

This sector is ferociously competitive and over the years even the best companies, such as AMD, Rambus and Novellus Sys have succumbed to the price pressures of the competitiveness in the market. Of course, most of the pressures in this market have stemmed from the relentless drive of Asian chip manufacturers quest to completely dominate the market through a combination of foreign currency exchange rate manipulation of the Renmimbi (Yuan) and cheap labor. Their domination of the markets has also been helped by a global market with an insatiable demand for low-priced chips.

Geez, Asian manufacturers can dump millions of chips at ridiculously low prices at any given time on the world's market. Of course, this competition has been good for consumers like you and me. We have been able to purchase cheap lap-tops and all types of fancy consumer electronic products, because the pricing strategy on these products are not based on a chip premium but instead on the sophistication of the product's software interaction with its chip and the popularity of the gadget (gadget demand premium- i.e. iPod).

In this case, this may be one time where outsourcing and competition from foreign manufacturers may have been a good thing. What consumers lost in jobs has surely been made up for in cheaper products, although most American-based chip companies manufacturer almost all of their semiconductors overseas. So the cry of shipping jobs overseas does not hold much credibility in this sector. However, growth may come from the premium chip sector of this market- which I believe is dominated by American companies, with demand for more sophisticated, security-driven, premium chips currently being fueled by the government, defense and aerospace industry.

Therefore, based on my analysis and observation of the semiconductor market, taking a position now in the industry may be a good investment idea at this time. Our semiconductor portfolio is a combination of exchange-traded funds positions, cash and some network and software stocks; of course I will be making adjustments to the portfolio as the the economy continues to improve which will also help the sector along. I will post the new portfolio tomorrow.

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