Why Semiconductors Will Outperform The S&P

• The PHLX Semiconductor Index (NASDAQ: SOX) has underperformed the S&P 500 this year, falling more than double the S&P.

However, Sterne Agee CRT's Doug Freedman forecasted this underperformance to end, noting that the firm prefers SOX to the S&P 500.

This outperformance comes despite the fact that CRT said it expects a "slow- to no-growth environment" for semiconductors in the next two years.

Despite its underperformance year-to-date, Doug Freedman at Sterne Agee CRT said that there remains "greater value" in the semiconductor industry versus the broader market. Specifically, Freedman said that CRT expects "opportunities" in the semiconductor industry from automotive, industrial and communication infrastructure upgrades.

Of these, Freedman was most optimistic on automotive growth, calling it the "key secular growth driver." He added, "the best/safest product cycle to play in semis is likely automotive trends where we see car content on the rise over the next 5 to 10 years." Of those best positioned to react positively from this trend: Analog Devices, Inc. (NASDAQ: ADI), NXP Semiconductors NV (NASDAQ: NXPI), Cypress Semiconductor Corporation (NASDAQ: CY), Maxim Integrated Products, Inc. (NASDAQ: MXIM) and Texas Instruments Incorporated (NASDAQ: TXN).

Freedman also highlighted some of the risks facing the industry, notably that there are cycles that the semiconductor industry faces. For instance, Freedman said that consumers may get the ability to use smartphones for longer, without the need to upgrade on an annual or biennial basis.

Further, for U.S. companies, Freedman said that China may start to offer new technology at "near-zero net margin" in order to gain market share. That could lead to "share loss and margin pressure for U.S. incumbents" in target markets.

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