Citi: Buy Semiconductors After 20% Selloff

Is it time for investors to buy semiconductor stocks following the recent selloff? At least one analyst is saying it is.

Christopher Danely of Citi commented in a note on Wednesday that semiconductor stocks have sold off more than 20 percent and are now favorable from a risk/reward point of view.

Index Indicator

Danely continued that in 2012, the PHLX Semiconductor index fell 20 percent from its peak, and in 2011 it fell roughly 30 percent from its peak at that time.

If history is any indicator, the index is currently down roughly 25 percent from its June 1 peak, implying a correction may be "in full swing."

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"We would characterize the 2012 sell off of 20 percent as more ‘typical' given the extra demand shock from the Japan tsunami and Thailand flood in 2011," Danely argued. "Given that we believe we are in a 2012-type of correction, we believe most of the downside is priced into semiconductor stocks."

Other Historical Statistics

Danely added that consensus earnings per share estimates for large cap semiconductors fell 14 percent during the 2011 and 2012 downturns. Meanwhile, 2015 earnings per share estimates for large cap semiconductors have now declined 12 percent. The analyst stated that this implies most of the earnings per share downside is "already reflected" in consensus estimates.

Danely further pulled up historical data, this time pointing out that the semiconductor index increased an average of 37 percent from the respective bottom in 2011 and 2012.

The analyst finally noted that his top picks consist of Texas Instruments Incorporated (NASDAQ: TXN) and Microchip Technology Inc. (NASDAQ: MCHP).

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