Investing in semiconductor stocks is always tricky. Industry cycles can lead to bumps in the road for the bigger players and massive potholes for the smaller ones. And one niche chip stock looks especially vulnerable to potholes right now.

At first blush, Cypress Semiconductor Corp. (NYSE: CY) is the picture of health. The company appears to have solid momentum as its parlays its strength as a niche chipmaker into higher profits.

#-ad_banner-#Cypress’ Programmable Systems Division, for example, is a world leader in high-performance programmable systems-on-a-chip (PSoC), which have applications in consumer electronics, communications, automotive, medicine, industrial and other sectors. As its name suggests, PSoC incorporates computing, communicating and dozens of other functions all on one chip.

That’s a big advantage for electronics manufacturers because it reduces design time, power consumption, space usage and, ultimately, production costs. It also enables these customers to make smaller, more sophisticated devices with more operating features and longer battery life. Cypress’ Programmable Systems division also makes touchscreens and other crucial PSoC interfaces.

The other main segment, Memory Products, is a top producer of several forms of random access memory for use in consumer electronics, telecom equipment, wireless infrastructure and military avionics, among other areas.

There’s also a Data Communications Division that mainly makes USB controllers and an Emerging Technologies Division consisting of two majority-owned subsidiaries. These provide foundry services and develop new technologies such as better memory solutions.

Cypress is parlaying its market strengths into bottom-line growth: Per share profits are expected to rise roughly 25% this year, and another 15% in 2015 (to around $0.60 a share). The company sounds unbeatable, doesn’t’ it? When you throw in a rebounding stock that’s up more than 18% in the past month and a 4.2% dividend yield, Cypress must be a no-brainer, right?

Despite the company’s apparent momentum, I see multiple red flags hinting that sales and profit  forecasts for the quarters and years ahead may be overly optimistic.

Let’s start with sales. A $725 million revenue base (in 2014) may seem impressive, but that’s actually down from $995 million back in 2011, and $1.6 billion in 2007 (Cypress spun off a solar-power division in 2008).  Analysts anticipate 6% sales growth next year, but that seem like a stretch as the company hasn’t generated that kind of year-over-year growth since 2011.

Of equal concern: Cypress has lost money in four of the past six years and averaged a dime-a-year loss from 2004 through 2013.

The company’s profit woes have a clear explanation. Cypress’ two largest divisions, which account for 87% of total revenue, are struggling, due to intense competition. From 2011 to 2013, their combined sales fell nearly 27%, mainly on much weaker demand for the Programmable Systems Division’s PSoC and related products. Sales look to be stagnant, at best, in both core divisions this year.

Analyst optimism appears to be predicated on the success of another division, Emerging Technologies, where sales more than doubled from 2011 to 2013 and should more than double again this year. The segment has produced some exciting technologies: A proprietary chip manufacturing and packaging process, for example, is now used by a couple dozen top semiconductor makers. The money-saving process is based on manufacturing techniques pioneered by the solar energy firm SunPower Corp. (NASDAQ: SPWR) (formerly a division of Cypress).

Trouble is, Emerging Technologies is still very small, accounting for only 3% of Cypress’s total revenue. So it could be years before the division is large enough to substantially impact overall company performance.

And while many analysts tout Cypress’s nice yield, they may be overlooking the fact that it’s unsustainable. At $0.44, the per-share dividend is a whopping 4,400% of trailing 12-month earnings, compared with the 30%-to-50% payout ratios that are more typical of the best dividend stocks. Excess cash can often be used to cover a dividend, but Cypress has $107 million in net debt.

Management faces some tough choices. Supporting the current dividend will be challenging in light of weak free cash flow, which has pushed gross cash to its lowest level in a decade. Considering its inability to achieve more consistent growth, perhaps Cypress would be wise to suspend its dividend and used the extra cash to help fund growth initiatives, particularly at the higher-margin PSoC business.

Risks To Consider: With the exception of PSoC, Cypress’s products tend to be highly commoditized. Thus, the company is vulnerable to competitors with similar but lower-priced alternatives.

Action To Take –> Don’t be taken in by Cypress Semiconductor’s recent surge. Although the company had a good third quarter, its longer-term performance and future prospects leave much to be desired. The logical conclusion is that is stock is quite overbought. So current shareholders should consider selling on the recent bounce. A cut in the dividend could push shares much lower, which makes Cypress  a promising target for short sellers.

One way to avoid stocks that look promising, but have cracks in the foundation is to look at a company’s Total Yield. This metric is proven to highlight fundamentally sound companies. In fact since 1982, these dividend payers returned an average of 15% per year. Last year, this group of stocks more than doubled the S&P 500’s return. For more information about Total Yield investing, click here.