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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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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