Editor's Note: This article was originally published at 12 p.m. EDT on Real Money on Aug. 19. Sign up for a free trial of Real Money.
Is it time to unplug from semiconductor stocks? While I'm not a chart watcher, my friends are, and they are growing increasingly worried about the Philadelphia SOX index. It seems the character of the index changed after the Fourth of July holiday. The SOX ran up 15% from mid-May to early July and since then has shown signs of topping. According to them, momentum has slowed. Since I'm not a technician, I decided to take a look at the fundamentals of the two hottest names in the group.
Year-to-date, the best performing stock in the semiconductor group is TriQuint (TQNT) , up 132%. The second best performer is merger partner RF Micro Devices (RFMD) , which is up 128%. The merger between the two should be completed in the second half of 2014.
In the 1990s, both companies were seen as niche semiconductor makers churning out boring, low-margin parts for microwave communications and radar. But when the smartphone business took off six years ago, TriQuint and RF Micro Devices were perfectly positioned. Both companies have extensive portfolios of high-performance chips that are critical to mobile devices. In fact, about 66% of TriQuint's revenues come from mobile handsets. The rest of the company's revenue comes from networking infrastructure (21%) and defense (13%).
TriQuint and RFMD are both known for their expertise in working with gallium arsenide (GaAs). GaAs is a very difficult material to work with and is used for high-frequency communications. Because GaAs is such a specialized field, TriQuint has had to develop its own proprietary manufacturing techniques and owns its own fabs. TriQuint and RF Micro have a huge advantage over other semiconductor companies in the communications game. A typical 3G handset contains five power amplifiers, all made out of gallium arsenide. In fact, the most critical parts of a cellular handset are 100% gallium arsenide. This has kept semiconductor bullies like Broadcom (BRCM) out of the high frequency game.