The big news late last week was that semiconductor leader Intel cut its revenue forecast, citing weaker demand and a loss of market share to its main competition, Advanced Micro Devices. Intel’s stock fell 3% after the news.

The announcement sent the Philadelphia Stock Exchange index of semiconductor stocks down 0.42 percent on Friday.

Reuters reports:

“Intel, which makes the microprocessors that drive 90 percent of the world’s personal computers, forecast revenue of $8.7 billion to $9.1 billion in the first quarter, down from a previous forecast of $9.1 billion to $9.7 billion…

“AMD, a much smaller company that has traditionally trailed Intel, has recently pressured the chip giant with technological gains that have given it an edge in performance and power use, especially in the market for servers that run businesses.”

The $19 billion Advanced Micro Devices (NYSE: AMD) is by no means a small-cap alternative to Intel. However, there are a few small-caps out there in the semiconductor business that could benefit from a stronger semiconductor market. More on them in a minute…

As it turns out, analysts saw Intel’s drop coming a mile away. From the Reuters report:

“ThinkEquity analyst Eric Ross expects the market share losses mark the start of a long-term struggle for Intel.

‘Next quarter is going to be just as difficult (and) market share losses are going to continue,’ said Ross, who put a ‘sell’ rating on Intel shares two weeks ago.”

Despite Intel’s report of weak demand for its products, the semiconductor market as a whole appears to be healthy… and possibly poised for more growth this year than we saw in 2005.

The world’s semiconductor market is improving, according to one research and advisory company, and investors can expect modest growth during the next few years.

According to a semiconductor market forecast compiled by Gartner Inc., semiconductor revenue should reach $257.7 billion in 2006. This is an almost 10% increase from $235.3 billion in semiconductor revenue that we saw in 2005, when the market only grew 7%.

With all this news coming out in the past few days, it’s no wonder these three small-caps (which are all linked to the semiconductor industry) are being snatched up left and right by investors:

Vitesse Semiconductor (Nasdaq: VTSS): This $775 million supplier of high-performance integrated circuits targeted for the communications and storage industries is a small-cap volume leader, trading at more than 9 million shares a day. Shares were up 2% this morning to $3.50.

RF Micro Devices (Nasdaq: RFMD): RF designs and makes radio frequency components for wireless products. This $1.4 billion company—which averages about 6.1 million shares exchanging hands every day—was up about 3 cents this morning to $7.59.

Sure, both these stocks are popular, but they also have one more thing in common: no earnings. Be sure to do plenty of research before grabbing for shares.

***Extra, Extra: Small-Cap Funds Stomp Competition…Again.

I know, I know, this really isn’t news to you. But the word seems to be getting out. Just yesterday, the Chicago Tribune ran an interesting column by Andrew Leckey on thriving small-cap funds.

You want proof? Here’s what Leckey has to say:

“Boosted by a tech stock revival, small-cap growth-stock funds lead all domestic equity categories in 2006, according to fund-tracker Lipper Inc. They’re making amends for a lackluster second half last year.

“Small-caps overall have had a powerful multiyear run: The Russell 2000 index was up more than 33% from the end of 1999 through the end of last year, while the large-cap Standard & Poor’s 500 index was down 15%.”

William McVail, lead portfolio manager for the $284 million Turner Small Cap Growth Fund, is interviewed for the article. His fund is up 22% the past 12 months.

McVail is, of course, a growth man, and he thinks the reason growth is doing better than value in small-cap stocks so far in 2006 is technology, “which is really getting its sea legs.” His fund—which is closed to new investors—includes 130 stocks.

His strategy? Do the research, find the trends and buy the best companies. And he was even nice enough to rattle off three of his favorite stock stories. Let’s take a look:

NutriSystem (Nasdaq: NTRI): This weight management and fitness outfit was the big small-cap Cinderella story last year, jetting from $5 last march to more than $45 earlier this year. It is trading for a little less than $40 today, and its market cap is at $1.4 billion.

The stock “had a big run before its stock took a hit when it announced preliminary earnings guidance a penny shy of analyst estimates. The company then delivered excellent earnings, and its stock rebounded.”

aQuantive (Nasdaq: AQNT): aQuantive deals in digital marketing services, digital marketing technologies and digital performance media. McVail tells the Tribune it’s a “soup-to-nuts Internet services firm for anyone who wants to get their message out on the Web.”

aQuantive also skyrocketed this past year, going from a stock that traded for a little more than $10 to about $25 per share today. It’s even challenging its small-cap status these days, with a market cap that’s flirting with $1.6 billion.

Citi Trends (Nasdaq: CTRN), Citi Trends is a discount urban fashion retailer. With a market cap of $466 million, it’s the smallest of the three, and probably in a better position to provide more growth this year.

As other retailers have struggled, Citi Trends has been posting big gains in sales. The company reported last week that same-store sales jumped almost 12% in February.

The AP reported after the announcements that “shares fell $3.97, or 9 percent, to $40.28 during afternoon trading on the Nasdaq, despite positive analyst comments. Volume was 769,279, well above average trading volume of 191,628.”

And as for more growth: “the firm is expected to significantly expand its square footage nationwide,” the Tribune says.

If the profit taking continues, Citi Trends could be an even better value in the next few months.

Until next week,

Gunner
March 6, 2006

Booming Small-Cap Semiconductors and Three Professional Growth Picks was originally featured in the Penny Sleuth.