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Semiconductors are the silicon backbone of the digital revolution. 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 8.4% over the past six months. This performance is a far cry from the S&P 500’s 6% ascent.

Despite the lackluster result, a few diamonds in the rough can produce earnings growth no matter what, and we started StockStory to help you find them. Taking that into account, here is one semiconductor stock boasting a durable advantage and two we’re passing on.

Two Semiconductor Stocks to Sell:

Allegro MicroSystems (ALGM)

Market Cap: $4.6 billion

The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ:ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.

Why Should You Sell ALGM?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 7.6% annually over the last two years

2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 19.8% annually

3. 9.4 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

Allegro MicroSystems’s stock price of $24.27 implies a valuation ratio of 49.8x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than ALGM.

Teradyne (TER)

Market Cap: $18.37 billion

Sporting most major chip manufacturers as its customers, Teradyne (NASDAQ:TER) is a US-based supplier of automated test equipment for semiconductors as well as other technologies and devices.

Why Does TER Worry Us?

1. Annual sales declines of 5.5% for the past two years show its products and services struggled to connect with the market during this cycle

2. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 8.7 percentage points

3. Free cash flow margin dropped by 5.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Teradyne is trading at $112.33 per share, or 27.1x forward price-to-earnings. If you’re considering TER for your portfolio, see our FREE research report to learn more.

One Semiconductor Stock to Watch:

Applied Materials (AMAT)

Market Cap: $137 billion

Founded in 1967 as the first company to develop tools for other businesses in the semiconductor industry, Applied Materials (NASDAQ:AMAT) is the largest provider of semiconductor wafer fabrication equipment.