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Semiconductors are traditionally viewed as a leading indicator to the economy and for the health of the technology sector. The performance of bellwethers in the sector might help explain where markets will move next. To better assess the semiconductor sector as a leading indicator, it is necessary to examine companies in sub-sectors: (1) mobile and wireless, (2) network, and (3) storage. Further, the outlook for these sub-sectors must account for company-specific issues that are not indicative of the health of the economy. For example, companies like OmniVision (OVTI) would not be a suitable company representing the sector. The company faces margin challenges for the next few quarters, as OmniVision refines its supply-chain to match customer demand.

1) In the mobile and wireless sector, Marvell Technology (MRVL), Maxim Integrated Products (MXIM), Broadcom (BRCM), Qualcomm (QCOM), and Texas Instruments (TXN) are all trading in a way that supports a view that smart phones sales are slowing.

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(Chart source: Yahoo Finance)

Investors may be discounting expected weak sales from both Research in Motion (RIMM) and Nokia (NOK). This would mean that sales for Apple (AAPL) and Samsung devices will continue to be strong. Samsung's Galaxy 3 smart phone is expected to sell 10 million units by July. The company is thought to have received 9 million in pre-orders.

Both Marvell Technology and Maxim Integrated Products offer dividends of 2.18% and 3.57% respectively. A word of caution: Marvell dropped 20% in 2012, making shares appear more attractive, but poor performing companies tended to fare worse. Marvell also generated 29% of its revenue from the mobile sector in its last fiscal year. 46% of its revenue came from storage.

2) The network sector is exhibiting a mixed-performance. JDS Uniphase Corporation (JDSU), Cisco Systems (CSCO) and Juniper Networks (JNPR) are all trading poorly. Only CIENA Corp. (CIEN) is doing well, supported by a strong quarterly report:

(click to enlarge)

(Chart source: Yahoo Finance)

Investors should expect CIENA to hold its value. While the other companies suggest economic weakness will weaken earnings, CIENA is in better shape. The company now has 25% of its business outside of carrier infrastructure. A greater proportion of revenue comes from enterprise, government networks, and research and education.

High bandwidth demand will only continue. CIENA expects networks to get 10- or 100-times bigger. Demand from Netflix (NFLX) and Salesforce.com (CRM) are examples supporting this viewpoint. By making networks programmable, CIENA expands network capacity disproportionately smaller than the rise in costs.

3) Demand for storage continues, due to the growth of cloud computing. For example, Facebook (FB) and Zynga (ZNGA) represent growth from social networking clouds. Not all storage companies should be considered stocks to buy right now:

(click to enlarge)

(Chart source: Yahoo Finance)

The trading performance of Seagate Technology (STX) and Western Digital (WDC) do not truly represent the health of the storage sector. Both companies benefited from a hard disk drive shortage due to a flood in Thailand last year, which temporarily raised profit margins. A weakness in shares of Micron Technology (MU) and SanDisk (SNDK) suggests that storage makers will face margin pressures. Solid State Drive ("SSD") prices declined steadily throughout 2012. In its most recent quarter, Micron reported a net loss of $320 million, or $0.32 per share when it reported on June 20. In 2011, Micron earned a profit of $75 million, or $0.07 per share.

Investors should expect Micron shares to continue to underperform the market.

Source: Semiconductor Stocks To Consider In Light Of Recent Declines