The run that the semiconductor segment has had over the past two years has been nothing short of spectacular. New innovation in everything from artificial intelligence to electric vehicles is continuing to drive demand. The Philadelphia Semiconductor Index (SOX) is up a stunning 45% since January 1, 2017, and while the prospects for the first quarter and the rest of 2018 look solid, one firm we cover here at 24/7 Wall St. is becoming increasingly cautious.

A new Deutsche Bank research report reviews the prospects for the first quarter, which the firm believes will come is slightly above current estimates, and then second second-quarters will be largely in line with Wall Street consensus. The analyst does note that volatility in the SOX is growing and cyclical concerns are mounting. The report said this:

Looking at 2018 as a whole, we expect secular growth hopes from areas such as Artificial Intelligence, Electric Vehicles, Advanced driver-assistance systems and mergers and acquisitions to continue, but be increasingly offset by slowing sector-wide growth and rising macro volatility (tariffs, M&A approval issues, rising rates, etc.), likely limiting further valuation expansion. Combining these issues with the SOX already being ~40% above its 5 year average relative price performance to the S&P, we expect the outperformance in semi sector stocks to moderate in 2018. Consequently, we believe semi investors should take an increasingly conservative posture, focusing on names with defensive attributes such as self-help-driven margin expansion potential and discount valuations.

The Deutsche bank team has five stocks that are its analysts’ favorites, and all are rated Buy.

Broadcom

This company has been on fire over the past year and remains a top pick at Deutsche Bank and across Wall Street. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand, and while the company was blocked in its attempt to buy Qualcomm, new chip designs are expected to drive future growth.

Broadcom has big exposure to the cloud through its Enterprise Storage segment (HDD controllers) and general data center build-outs in its Wired Infrastructure segment. Within HDDs, enterprise units are 15% to 20% of the business on a unit basis and 20% to 30% on a revenue/profit basis.

Broadcom investors receive a 2.91% dividend. The Deutsche Bank price target for the shares is $325, and the Wall Street consensus target is $322.03. Shares closed Thursday at $239.43.

Intel

This semiconductor leader is working hard to focus more on Internet of Things and data center cloud spending and away from PCs. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide. Its platforms are used in various computing applications, comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

Intel’s “data-centric” businesses now accounts for about 45% of revenues, versus less than 40% three years ago. The Data Center Group is poised to grow by high-single-digit percentage points over the next few years. In addition, many feel that Intel’s cloud hyperscale customers will continue to spend aggressively on cloud computing infrastructure over the next few years. This growing silo of business, combined with the company’s legacy products, makes it a solid and reasonable stock to own for 2018.

Intel investors receive a 2.35% dividend. Deutsche Bank has a $55 price target, and the consensus price objective is $54.03. The shares closed Thursday at $52.72.