A new report by Pacific Crest analyst Michael McConnell focused on semiconductor stocks. Recent data from the space emphasize the importance of stock selection, and McConnell explained exactly what investors should look for and which names the firm likes best.

Lowered Expectations

Semiconductor stocks have had a rough go of it recently. In the past three months, the Market Vectors Semiconductor ETF SMH 2.48% has fallen 17.3 percent.

In his report, McConnell outlined the causes of the recent weakness. Following a relatively weak earnings season, expectations for the next few quarters have been dialed back. According to the report, 80 percent of semiconductor companies issued guidance below consensus estimates. The uncertain demand environment in China is likely a key driver of the weak guidance.

Inventory Levels Elevated

In addition to weak earnings and guidance, the latest inventory numbers from many semiconductor names are…

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