A Big “Low-Risk, High-Reward” Trade in Tech Stocks

Last year’s bloodbath could lead to this year’s boom.
 
Keep repeating that to yourself this month. It could be the key to making big money in 2012.
 
Over the past few weeks, Stansberry & Associates has devoted plenty of coverage to sectors that suffered big declines in 2011… like copper producers, steel stocks, and uranium. These beaten-up sectors could stage big “relief” rallies in the coming months.
 

#-ad_banner-#Technology investors should keep this in mind as well… especially when it comes to semiconductors.
 
Like resource stocks and steel stocks, semiconductors are a major “boom and bust” area of the stock market. The firms make the tiny “engines” that power cell phones, televisions, gadgets, and all sorts of other electronic devices. The “lifecycle” of their industry leads to big swings in share prices.
 
Last year, the big swing was down. It was a bloodbath for many of the smaller semi players. Even quality names fell by 33%-50%. Investors were worried about a global economic slowdown… and people dumped riskier assets in general.
 
But we’re starting to see signs that the next move is going to be UP.

 
For example, Linear Technology (LLTC) makes millions of tiny parts each year that go into electronics. The company sells over 7,500 different products that end up in everything from temperature controls to medical devices to car dashboards. Not surprisingly, Linear got hurt last year as customers cut orders due to the rough global economy. Despite sitting on nearly $1 billion in cash, the company saw shares plunge more than 25% from their highs.
 
Last week, Linear announced results from its latest quarter. Sales were down 11% versus the same time a year ago. The company had to shut down factories at times, due to weak orders from cautious customers. The crazy part is – the market loved the results. Shares of Linear surged more than 11% the day after the news was announced.
 
In fact, the news lit up the entire semiconductor sector. More than a dozen other beaten-down semiconductor stocks jumped 5%-plus after Linear’s results hit the wires.
 
Investors should pay attention. A bullish reaction to “so so” news is a sign that a “bad to less bad” rally is set up for the first half of 2012.
 
As I’ve mentioned before, semiconductors are finding their way into more products than ever. Demand isn’t just coming from new devices (the enormous “gadget boom” that I’ve written about)… Computers now appear in tons of products that used to be “simple.” From automobiles to power tools, semiconductors are spreading into everything.
 Last year put a damper on the boom, as companies responded to the tough global economy by cutting their orders. The 2008-2009 recession is still fresh in the minds of business managers. No one wanted to be sitting on a large inventory of chips. According to the Semiconductor Industry Association, total semiconductor revenues fell 8% in 2011. Units sold fell 10%.
 
That’s why the news out of Linear is so important. Even though business isn’t booming right now, it looks like the storm has passed. That’s the setup for a “bad to less bad” recovery – where we see big gains in stocks BEFORE business results turn sharply positive.
 
Large players like Intel and Qualcomm will do well in a general semiconductor upswing. But traders should consider the smaller, more beaten-up names. They’ll rally the hardest.
 
Here are a few top names, their market cap, dividend yield, and how far they are down from their highs…

Should the overall market trend higher in 2012, this list of beaten-up semi players should do very well. Traders can consider buying at these levels and placing a stop near their depressed 52-week lows. (TQNT and SWKS look particularly attractive from a “buy near the bottom” standpoint.)
 
This sets you up for a limited-downside, high-upside trade.