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Avoid Cypress Semiconductor

Stocks in this article: CYBRCMQCOMARMHINTCAAPLNOKBBRYMSFT

NEW YORK ( TheStreet) -- At the onset of 2013, the Street expected a strong rebound in chip stocks. Although the industry did rebound from a weak 2012 to post 20% gains last year, it was nonetheless a disappointment, given that the sector (in aggregate) still trailed the 25% gains of the S&P 500.

So there's still a chance that things will only get better. But I'm still trying to reconcile the reason for the faith in Cypress Semiconductor (CY), which has posted a three-year stock decline of 20% despite having a strong patent portfolio. The company has a well-diversified operation that, in some instances, surpasses both Qualcomm (QCOM) and Broadcom (BRCM). Management has failed to capitalize on these strengths.

With consistent outperformers like Qualcomm and ARM Holdings (ARMH) still leading the way, I understand why the Street has remained optimistic. I will even grant that investors' love for Intel (INTC) is justified, given the company's mobile advances.

But Cypress has struggled to grow since picking off rival chip company Ramtron International almost one year ago for $110 million. There was a lot of speculation as to what Cypress was thinking when the deal was announced. Given Ramtron's capabilities in non-volatile memory chips and mobile, I believed the acquisition made sense. But these predictions were only partly correct.

Today, with the stock still under pressure and a business that has seemingly gone nowhere in three years, I believe it's time for a drastic change, especially since the company's management has been unable to execute on all the "potential." With the company due to report fourth-quarter earnings on Thursday, management will have to wear magician hats to make the Street see what really isn't there -- that Cypress can be a long-term outperformer.

The Street will be looking for 8 cents in earnings per share on revenue of $166.3 million, which would represent year-over-year revenue decline of almost 8%. As low as these numbers may appear, I don't see how the company will be able to meet these targets, given Cypress' weakness in mobile computing and in Asian markets. Plus, there are still significant operational deficits management is working to overcome related to the Ramtron deal.

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