Three small-cap tech stocks to buy now

The semiconductor industry is a highly cyclical one. But, says Louis Basenese, the bad times are behind us, and the stage is set for an epic rebound. Here, he tips three small-cap semiconductor stocks to buy now.

Investors are totally preoccupied with a meaningless question right now: How long will this bull market last? Ignore them. Nobody can predict the future. Instead, I recommend you focus on one industry destined to dish out profits in the year ahead, no matter what.

That's a bold statement, for sure. And it's even bolder when I tell you that the industry I'm talking about is one that most investors fear because of its volatility.

It's the semiconductor industry. Now, let me prove why it's worthy of your attention.

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The semiconductor industry is set for an epic rebound

Everybody knows the semiconductor industry is violently cyclical. That means during good times, semiconductor companies make a boatload of money. But at the first hint of bad times, fortunes can turn on a dime. And so do share prices.

That's exactly what unfolded through the global downturn. While the S&P 500 got sacked 37% in 2008, the Philadelphia Semiconductor Index tanked 59%.

But the bad times are behind us. An executive at the world's largest chipmaker, Intel Corp, said we're coming off "the worst recession the semiconductor industry has seen since its inception." The stage is set for an epic rebound.

Case in point: Last year, semiconductor sales dropped by 9.6%. But this year, sales are expected to surge by 19.9%, according to leading technology research firm, Gartner. iSuppli Corp. is also calling for a double-digit rebound. In dollar terms, we're talking about a $45 billion swing! I challenge you to find a better opportunity elsewhere in the markets.

And while that's sure to prompt the sceptics in our midst to doubt that such a strong rebound is possible, I assure you that it's not just possible, it's imminent. For one simple reason.

The return of the big (corporate) spender

Everybody knows that corporations cut their spending to the bone in order to survive the past two years. But they can't save their way to prosperity. Cutting costs is not a long-term growth strategy.

Eventually, companies need to invest in future growth. And technology companies tend to be the first beneficiaries, as their products or services often increase efficiency and growth for customers.

Again, the evidence backs this up:

Business Roundtable recently conducted a survey of CEOs at leading American companies. The results revealed that 40% of them expect higher spending in the next six months double the number from last fall. Since these guys (and gals) control the purse strings, I think they know what they're talking about.

Based on proprietary data, research firms Gartner and IDC upped their predictions for global IT spending in 2010. They're calling for a 4.6% and 3% increase, respectively.

New data from IT research shop TheInfoPros reveals that at least 30% of companies will increase their IT spending on servers.

Bottom line: We're coming off a period of extremely depressed corporate spending, particularly IT spending. And companies can't be tightwads much longer.

More reasons why semiconductors are set to surge

The average corporate computer is a dinosaur, checking in at four to five years old. At that age they start to cost more to keep than replace. The only solution is to buy new ones. And the successful release of Microsoft's Windows 7, plus new product launches from server and PC manufacturers, only makes the need to upgrade even greater.

So any way you slice it, we're long overdue for an upgrade cycle in Corporate America. That bodes well for semiconductor companies, which supply the guts for all these computers.

I promise you this isn't a guess about what's going to happen. The situation is unfolding as we speak. Major players Texas Instruments and LSI Corp. recently raised their guidance. Companies don't do that unless business is really picking up. And the Semiconductor Industry Association recently reported that February sales jumped 56% year-over-year. (I'd say that qualifies as a rebound.)

So how do you position your portfolio to profit?

Semiconductor industry small caps

The last time a similar situation unfolded in the semiconductor industry in the five years leading up to the dotcom bust it propelled Intel from an itty-bitty $4 stock to a $75 behemoth.

With a market cap of $124 billion, though, a repeat performance is completely impossible. But that won't stop the "next Intels" smaller, innovators in the space from blasting off.

Three such small-cap companies that top my list are:

NetLogic Microsystems (Nasdaq: NETL)

Silicon Laboratories (Nasdaq: SLAB)

Volterra Semiconductor (Nasdaq: VLTR)

Each company is an innovator, operating from a position of financial strength, and with little to no debt.

Even better - all three are expected to increase their earnings by at least 80% (that's not a typo) in the coming quarter. And that's more than enough growth to propel these stocks higher, even if the current bull market peters out.

This article was written by Louis Basenese and was first published in the daily investment newsletter Investment U on 11 April 2010.