These beaten-down stocks could be ready to rally

It’s been a tough year for semiconductor stocks.

The industry group has fallen 12.4 percent in 2015, making it the third-worst performing sector in the S&P 500, trailing only transportation and energy. But according to one trader, it is set to stage a comeback.

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“From a valuation perspective, it looks like they could be turning around,” said Erin Gibbs, equity chief investment officer of S&P Capital IQ.

Gibbs points out that semiconductor stocks are trading at about 20 times expected forward earnings, which is greater than the S&P 500‘s multiple, but still just above where the stocks have “consistently found a valuation bottom.”

Additionally, Gibbs said earnings per share are expected to grow 44 percent in 2016.

“2016 EPS estimates have been consistently revised down this year, so that estimated growth may come down some more, but even with downward revisions, semis look to be one of the highest-growth industries in 2016,” Gibbs said.

However, options trader Stacey Gilbert of Susquehanna said there’s been a lot of caution surrounding semiconductor stocks lately.

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“It’s more cautiously wait and see,” Gilbert said. “It’s off some of that high risk that we saw at the end of 2014.”

She said although traders are not making outright bearish bets on the stocks, she has seen some protective put options being bought on companies such as Linear Technology after the company reported earnings in July.

The SPDR semiconductor ETF (XSD) fell 2.5 percent Tuesday after a brief rally last week. Still, the fund has far outperformed the industry group, and is down just 1.2 percent this year.

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