What's Next for the Chip Makers?

The recent downturn in semiconductor chip orders has caused many of these stocks to drop, but MoneyShow's Jim Jubak sees potential bright spots in this beaten down sector.

It's another week of videos, another disappointment. We're going to talk about chips but not chocolate chips. Okay, what we're getting is a general sense from China and from some companies, really just the small companies, things like microchip technologies, that demand is down and, therefore, there's not enough orders. We've had some pretty big 10% and 11% drops in the sector and it's starting to look like this is going to be a weak part of the technology cycle.

Some of the worry here is that the companies that are reporting a downturn in orders are what are known as early cycle indicators so there's some sense of maybe this is the whole sector showing problems. What I'd be looking for here is to look at companies that still have really good growth stories that might be able to transcend an overall drop in demand for chips from the PC end user, and from tablet end users, because those are places where we're seeing weak demand. I would look at companies in the smartphone business because smartphone demand still seems to be doing just well and, here, you're looking at a company like Qualcomm (QUAL) and US but that's at the upper end of the market.

You might want to look at some of the Chinese chip makers because the vast growth of the market is for low price smartphones, Samsung is getting hit on that, but Chinese companies are selling really, really well at a price below Apple . You might want to look at NXP Technologies (NXPI) because they make the near field chips that are going to be used in Apple Pay so there are particular cycles.

You might want to look at Taiwan Semiconductor, Manufacturing (TSM) because they produce pretty much chips for everybody so they're doing a lot of work for all of the smartphone manufacturers, all the modem makers, so those are stocks I'd be looking at here. I wouldn't be looking necessarily to buy into the technology sector. I think the NASDAQ is down about 8% and the NASDAQ is very heavily technology and financial. I think we're going to see further erosion in technologies but, at some point, in a global economy where we're looking for growth, one of the places that delivers growth is the technology sector so, if you're selective and look for growth stories in this, you might actually be able to get a bargain.