NEW YORK (CNN/Money) - Semiconductor stocks have been getting walloped ever since the Nasdaq turned down in January. The cumulative decline has now grown so large that premium stocks with high growth rates are selling at substantial discounts to their widely recognized value.

Applied Materials, for instance, is down more than 20 percent since January, despite strong results last quarter and big projected earnings gains this year and next. Any investor with the slightest instinct for bargain hunting has to be wondering two things: why is this happening and is there something wrong that investors don't know about?

With growth stocks, there's always the possibility of a future disappointment. Applied Materials is scheduled to report earnings for the second fiscal quarter on May 18, and it's conceivable that there could be some sort of negative surprise. [See results here]

In addition, some analysts say that even if results for the next few quarters are strong, the bull market and the chip recovery could start to fade as early as 2005. That would mean a subpar cycle for the semiconductor industry as a whole.

Neither of those risks can be dismissed entirely. But if you believe, as I do, that this economic recovery has considerable room to run, the case for Applied Materials seems quite compelling.

For starters, you have to recognize that Applied Materials and many other semiconductor shares belong to a special category, known as cyclical growth. Such stocks swing up and down in price according to the economic outlook just as automakers and mining stocks do. But when you average out their performance, the growth rate is extremely high.

Recently in Sivy on Stocks The Sivy Seventy

The trick with cyclical growth stocks is to scoop them up on a dip and then hold them long enough to enjoy those high average growth rates.

The entire semiconductor sector is down an average of 21 percent from its January highs. But that retracement simply looks like a normal correction after the sector's huge gains over the previous year. For 2003 as a whole, the semiconductor sector was up more than 60 percent, compared with a 22 percent gain for the S&P 500.

Is there anything fundamentally worrying about the outlook for semiconductors? Not that I can see. Worldwide sales of chips have been accelerating and were up 34 percent for the first quarter, compared with year-earlier levels. For 2004 as a whole, sales are expected to be at least 20 percent higher than in 2003.

Applied Materials' own results for the first fiscal quarter looked mighty impressive, too. Sales were up 48 percent versus year-earlier levels. Earnings, which were positive compared with a loss the previous year, are projected to recover powerfully, rising to 79 cents a share this year and $1.14 next year.

Even more important, perhaps, is the trend in orders, which rose 32 percent from the previous quarter and 66 percent from a year earlier. That trend is likely to continue as chipmakers switch over to equipment that uses larger wafers, which produce chips at a lower unit cost. In April, Intel said it had begun a $2 billion conversion to such larger wafer fabrication equipment.

I'm fairly optimistic about the economic outlook, but I can understand how some analysts could worry about the durability of the chip cycle beyond 2005. Given today's price, however, Applied Materials (AMAT: Research, Estimates) hardly seems inflated by overly bullish expectations.

At $18.12 a share, the stock trades at 23 times estimated 2004 earnings and only 16 times next year's projected results. That's an extraordinarily cheap price for a company projected to grow at a 20 percent compound annual rate over the next five years. And you'd have to be quite a bear to think growth won't be sufficient to justify that multiple.

Michael Sivy is an editor-at-large for MONEY magazine. Sign up for free e-mail delivery every Monday and Thursday of Sivy on Stocks.