Why semiconductor stocks may be ready for a fall

Employees inspect semiconductor chips on the production line at the Hana Microelectronics plant at the Hi-Tech Industrial Estate in Thailand.
Dario Pignatelli | Bloomberg | Getty Images

The S&P tech sector has had a volatile year thanks to a selloff and recent comeback in social media, cloud and internet stocks, three sub-sectors in tech.

But one areasemiconductorshas been going strong. The Philadelphia Semiconductor Index is outpacing the gains in the broader markets, up 10 percent over the past two months and up 17.5 percent this year, as investors bet on rising demand for chips and improving market dynamics.

Now, some Wall Street analysts believe semiconductor stocks may be ready for a tumble.

Analysts at Goldman Sachs wrote: "In our view, semi stocks have clearly reached problematic territory not just in the levels but more importantly in the markets' willingness to overemphasize good news and ignore bad news."

Semiconductor stocks are the most overbought they've been since the tech bubble in 2000, said Jonathan Krinsky, MKM Partners Chief Market Technician.

Krinsky thinks the risk/reward of going long on semiconductor stocks is poor over the next one to two months.

"At a minimum there should be some consolidation," he told CNBC.

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One catalyst that has been driving semiconductor stocks higher is the hope that stabilization in the PC market will sustain demand, say some experts.

Intel recently raised its outlook for the second quarter due in part to better-than-expected demand for personal computers used by businesses.

But Pacific Crest Securities earlier this week downgraded shares of two semiconductors—Advanced Micro Devices and Nvidia—to underperform, citing weak PC demand. Analyst Michael McConnell wrote that a recent Asia trip showed him that "all may not be as peachy as it seems in PC land."

"While consumer notebook sales show signs of stabilization, motherboard manufacturers note that weak consumer demand and excess inventory will drive unit sales unseasonably down 5-10 percent quarter-over-quarter in the third quarter, despite strong corporate demand," McConnell wrote.

But not everyone agrees.

B. Riley analyst Craig Ellis agrees that semiconductor stocks have had a great run, but Ellis tells CNBC that the fundamental story remains favorable thanks to the adoption of smartphone technologies in emerging markets.

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Ellis also says the uptick in strategic M&A in the semiconductor space will also be a catalyst for these stocks moving higher.

"M&A will continue to provide earnings upside to current forecasts," Ellis told CNBC.

On whether semiconductor stocks are becoming expensive, Ellis said "valuations are still reasonable, despite the recent run-up."

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The stocks are also attractive to investors who are looking for yield during a time when rates are low, Ellis said.

"Semiconductor stocks provide phenomenally good dividend downside protection versus any other sector."

The average dividend yield of semiconductor stocks is in-line with the S&P 500, said Ellis. His favorite dividend-paying semiconductor stocks: Sandisk, Analog Devices and Skyworks Solutions.

By CNBC's Seema Mody. Follow her @seemacnbc