Semiconductors are the core infrastructure powering the Information Age. But they’re also susceptible to economic fluctuations as chip demand will ebb and flow with capital spending. Unfortunately, the market seems to be predicting a downturn as the industry has tumbled by 4.5% over the past six months. This performance is a far cry from the S&P 500’s 7.5% ascent.

Cyclicality aside, a cautious approach is imperative because Moore’s Law (a principle stating that computer productivity doubles every two years) will eventually make even the most impactful technologies today obsolete. Keeping that in mind, here are three semiconductor stocks we’re steering clear of.

Vishay Intertechnology (VSH)

Market cap: $4.51 billion

Named after the founder's ancestral village in present-day Lithuania, Vishay Intertechnology (NYSE: VSH) manufactures simple chips and electronic components that are building blocks of virtually all types of electronic devices.

Why Are We Bearish on VSH?

1. Annual revenue growth of 3% over the last two years was below our standards for the semiconductor sector
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 28.9% annually
3. Cash-burning history and the downward spiral in its margin profile make us wonder if it has a viable business model

At $28.36 per share, Vishay Intertechnology trades at 21.6x forward P/E. Read our free research report to see why you should think twice about including VSH in your portfolio.

Himax (HIMX)

Market cap: $2.04 billion

Taiwan-based Himax Technologies (NASDAQ: HIMX) is a leading manufacturer of display driver chips and timing controllers used in TVs, laptops, and mobile phones.

Why Is HIMX Risky?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 7% annually over the last five years
2. Free cash flow margin shrank by 16.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Himax’s stock price of $11.48 implies a valuation ratio of 14x forward P/E. Dive into our free research report to see why there are better opportunities than HIMX.

Entegris (ENTG)

Market cap: $24.45 billion

With fabs representing the company’s largest customer type, Entegris (NASDAQ: ENTG) supplies products that purify, protect, and generally ensure the integrity of raw materials needed for advanced semiconductor manufacturing.

Why Are We Hesitant About ENTG?

1. 4.9% annual revenue growth over the last two years was slower than its semiconductor peers
2. Projected sales growth of 19.4% for the next 12 months suggests sluggish demand
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Entegris is trading at $153.25 per share, or 33.1x forward P/E. To fully understand why you should be careful with ENTG, check out our full research report (it’s free).

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