(MONEY Magazine) – Many of us associate semiconductors solely with personal computers. But those in the know understand that there are just as many flavors of chip stocks as there are of chips in supermarkets. There are unique microprocessors for cars, fighter jets, refrigerators and DVD players. "When you think of chips, you probably don't think of anti-lock brakes or elevator controllers," says Kevin Landis, who runs Firsthand Funds. "But a chip company that sells chips for heating systems is very different from one that sells chips for routers."

Even so, investors have shown little appetite for chip stocks of any flavor this year. Thanks to an onslaught of profit warnings, the Philadelphia semiconductor index, a basket of 17 companies, is down a staggering 52% in 2002. It's more than just anemic profit forecasts that have repelled investors. Industry watchers fear that even when the business environment improves, the PC industry, which accounted for 42% of the $139 billion in semiconductor sales in 2001, will never return to the explosive growth rates of the '90s. "The industry is going to look very different going forward," notes former SG Cowen analyst Drew Peck, who now runs a technology venture-capital firm. "The companies that will recover the best have a diverse target market."

So where can you expect to see a growing demand for chips? In the auto industry, for one, which uses chips in anti-lock brakes, navigation systems and even windshield wipers. According to the Semiconductor Industry Association, chip sales to the U.S. auto industry increased from $7.9 billion in 1996 to more than $11 billion in 2001.

Sales to military contractors are expanding too. While the defense industry has not been a big customer in the past, Gartner Dataquest predicts that sales of high-end chips used in military devices such as missiles, tracking systems and unmanned fighter jets will grow at an 11% annual clip and reach $6.1 billion by 2005.

Consumer electronics is another bright spot. Research firm In-Stat/MDR expects that by 2006, video-game consoles (such as Sony PlayStation) and digital cameras will each consume $50 million a year in chips. So-called smart home appliances (such as programmable refrigerators and motion-sensitive lights) will gobble up another $9 million. And don't forget mobile phones. In 2001, $32 billion worth of chips went into them.

Thanks to the doom and gloom reflected in the stocks of specialty semiconductor makers, savvy value investors like Olstein Financial's Bob Olstein and Marty Whitman of the Third Avenue Value fund have been snapping up shares of these niche players. With some chip stocks trading for less than the value of their assets, these investors are confident that their downside is cushioned. "I think I got them all at least at a 50% discount to fair value," says Sean Reidy, co-manager of the Olstein Financial Alert fund, which has 8% of its $1.3 billion assets in seven chipmakers.

Be warned, though, that even the companies with the brightest outlooks may continue to struggle if the anticipated recovery lags. "The sector is at a bottom from a business perspective and the valuations probably are too," says Dan Scovel, an analyst with Needham & Co. "But the question is, how long will they stay there?" Keeping that concern in mind, when we went prospecting for promising chip companies, we considered only ones with the financial strength to survive even if a recovery takes longer than expected. The four companies profiled below all have strong balance sheets and excess cash as well as promising growth prospects.

International Rectifier (IRF) makes chips that regulate the flow of electricity between an outlet or battery and a device. Its products, found in all kinds of electronics, ranging from PCs to autos to washing machines, "aren't glamorous and don't capture the minds of investors," notes Peck. But perhaps they should. For one, IRF gets about 7%, or $48 million, of its $720 million in revenue from licensing its patented products, which ensures a consistent cash flow. And after a rocky period in early 2002, IRF recorded a 26% jump in sales in the quarter ended in September; net income rose by 14%. Plus its $671 million in cash and short-term investments will help the company weather storms. IRF has a slew of new contracts for its power-management chips for high-end washers, fridges and air conditioners by Sharp, Whirlpool, Maytag and GE. IRF's chips will go into more than a dozen new defense and aerospace systems built by Lockheed Martin and Northrop Grumman. Edward Hemmelgarn of Shaker Investments (who has 5% of his portfolio in the stock) says that at a recent $16.77, the shares are very attractively priced.

With over half its business coming from the computer market, LSI Logic (LSI) might not seem like a promising investment. But analysts say two factors distinguish it from its PC peers. First, about half of the company's $487 million in sales comes from the computer-data storage market, one of the few growing segments of the PC business, while another 32% comes from consumer electronics such as DVDs and Sony PlayStations. Second, the company boasts a healthy balance sheet, with a cash pile of nearly $944 million. Detractors are concerned that LSI continues to commit too much money to factories, leaving it vulnerable to competition from cheaper manufacturers abroad, but management says that it is on track to outsource half of its production within the next two years. "We think the stock is 50% undervalued," says Reidy. LSI's Wilf Corrigan, who's been CEO for 30 years, agrees: He bought 150,000 shares in August for about $7 each; recent price: $5.85.

Maxim (MXIM) is an analog-chip maker, an expertise that caters primarily to mobile-phone makers. Analog-chip makers have held up better than other chipmakers during the recession in part because the highly technical manufacturing process required shields them from Asian competition. Thanks to Maxim's lavish 37% operating profit margins and heady projected growth rate of 25% (plus a debt-free balance sheet that is stocked with $788 million in cash) investors accord its shares a whopping 50% premium to its peers'. Bruce Garelick of Loomis Sayles, which owns $30 million worth of the stock, argues that Maxim's ability to command such sumptuous margins during the worst downturn in history proves that it is a premier franchise. "The valuation isn't rich for what you're getting--the highest pricing power in a cyclical trough," he says. At $29.43, Maxim's shares are trading at less than half their 52-week peak.

TriQuint (TQNT) specializes in high-performance gallium arsenide chips, which are used mostly in communications devices such as modems and radars. With 35% of its 2000 sales coming from the telecom and cable industries, TriQuint did not escape the recent meltdown--over the past year, profits plummeted by 46% as revenue shrank by 12% to $335 million. Meanwhile, the stock has plunged to under $5 from $21. Nevertheless, TriQuint's sales to customers in the mobile-phone and aerospace and defense industries increased by 9% to $168 million. More important, the balance sheet looks solid. The company has nearly $336 million in cash. "Even in tough times they have financial resources," notes Curtis Jensen, an analyst at Third Avenue Value fund, which has been adding to its stake and owns 5 million shares. At a recent $4.68, Jensen explains, the shares are trading below the value of tangible assets on TriQuint's balance sheet. "Wall Street is wrong on this one," asserts Chris Bonavico, manager of Transamerica Premier Growth Opportunities fund, who owns 1.5 million shares. --Cybele Weisser