There’s no getting around it: the semiconductor industry is volatile. Companies in this sector regularly face not only severe competition and frequent price cutting, but must navigate severe boom-and-bust cycles marked by spurts in demand for new products followed by dry spells and product delays that make it challenging for even the largest chip makers like Intel Corp. (Nasdaq: INTC) to project future business.

For the smallest players in the sector, these competitive challenges are often magnified.

Still, chip companies, when they carefully selected, can make excellent investments. Chips are a part of life, not only in computers, but in lots of basic consumer goods like cars and washing machines, and a surprising number of low-tech items, like alarm clocks. And on the high-tech front, new and improved chips are constantly being developed for mobile communications applications.

Two small caps to watch are TriQuint Semiconductor Inc. (Nasdaq: TQNT) and Mindspeed Technologies, Inc. (Nasdaq: MSPD).

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