Chip stocks seem to have turned a corner. What's amazing is that these stocks, which have practically become a byword for the bull market, might still be too cheap.

The iShares Semiconductor exchange-traded fund has risen in nine of the past 12 sessions through Thursday. With a moderate gain in September, the popular ETF, which trades under the ticker SOXX, is 12% above its July lows. It's quite a comeback-and one that just might be sustainable.

The bull case starts with positioning. While SOXX is currently sitting on a 65% year-to-date rally, those who bought on June 22 are still nursing a 20% loss. The peak was driven by euphoric sentiment and by massive bullish positioning on the part of hedge funds like Situational Awareness, which would go from a $100 billion behemoth to a cautionary tale when the artificial-intelligence trade reversed in July. Chips might not return to those June glories, but the washout in sentiment and positioning creates opportunity.

"You had too many people on one side of the boat," says Brad Warden, who co-manages the Nomura Science & Technology fund. "[Now there's] a healthy setup as you go into the end of the year."

Valuations are also looking cheaper. The PHLX Semiconductor Index trades at a forward price/earnings ratio of 19.8, in line with the valuation for the overall S&P 500, while its two biggest components-Nvidia and Micron Technology-trade at P/Es of 16.6 and 6.3, respectively, per FactSet. They're not as cheap as they look. As cyclical businesses, earnings rise and fall with the cycle, says Warden, and the valuations imply that investors believe gross margins will likely fall from their current outrageous heights.

Warden doesn't dispute the cyclicality of the chip business, but believes earnings and margins will prove heartier than many investors fear. Just this past Tuesday, for instance, OpenAI CFO Sarah Friar noted that the company would be doing more if it had access to more compute. Warden argues that chip companies are set to "generate a lot of cash flow, and buy back a lot of their stock, which is very accretive to long-term shareholders."

Thomas Martin, senior portfolio manager at Globalt Investments, agrees with the sustainability point, but is only slightly overweight the group because of its substantial volatility. "The evidence is that the demand is going to be there, and it's going to be a very long cycle," he says. "While it's tempting to press that bet a little more, you're liable to get your head handed to you if you put on an outsized position."

In fact, these stocks are so volatile, and have become such a large share of the index, that passive investors don't even have to own them to benefit from a continued chip rally. Rocky Fishman of Asym Research points out that the semiconductors are now responsible for 60% of the average daily move of the S&P 500. That means that they'll be a big driver of the index from here.

But if you're looking to outperform-and who isn't?-following Martin's lead and betting on the chips looks smart. Just keep your head.