The Chip Stampede May Be Hitting a Wall
From today's NYTimes.
NEW YORK -- The NASDAQ Composite Index is no longer simply a stock index; it's a phenomenon. The index is up an astonishing 46.9 percent this year; in 11 of the last 12 trading days, it has closed at record highs.
Of the fuels propelling this rocket in recent weeks, none has been more potent than the semiconductor sector. Shares of companies that make chips for the world's computers and other electronic gear have surged on rising sales and higher chip prices.
As a result, the Philadelphia Stock Exchange Semiconductor Index of 16 companies is up 18 percent since Nov. 1. For the year, it is up 87 percent.
Hot does not begin to describe these stocks. Applied Materials, a semiconductor equipment maker, had sales in the past 12 months of roughly $4 billion. Its market value is 10 times that figure. The Altera Corp., a maker of integrated circuits, is trading at approximately 16 times its $772 million in sales over the past 12 months.
To put this run-up in perspective, during other booms for semiconductor makers, the stocks rarely traded higher than two times their sales.
What strikes some as peculiar about the current stampede into semiconductor shares is that worldwide sales of chips are expected to rise just 14 percent this year over last. Moreover, a multitude of computer manufacturers and resellers -- IBM and Inacom, to name one of each -- have recently warned that the outlook for their businesses in the fourth quarter and beyond looks worrisome.
Why are investors paying as much as 90 times earnings for companies whose futures depend on orders from computer makers who are singing the blues?
Those who study the semiconductor industry -- a very cyclical business -- say recent sales increases at many of these companies are a result of an extraordinary inventory buildup by computer makers in recent months.
These companies placed unusually heavy orders for chips on fears that an earthquake in Taiwan would cut supplies and in anticipation of strong computer sales to customers eager to buy before 2000.
If computer demand does not soak up this inventory in the current quarter -- and IBM's warning of a slow fourth quarter lends credibility to that fear -- the world will be awash in chips. Prices will fall again and so will the stocks.
Fred Hickey, editor of the High-Tech Strategist newsletter, thinks that sales of computers are starting a downward spiral that will extend into next year: "We are going into a long period of decline in computer demand because buying has been accelerated in the past few years" mostly by fears of Year 2000 computer problems. He forecasts a crash in semiconductor orders.
Investors piling into semiconductor shares may not know that many insiders at these companies are exiting. Insider filings take time to trickle in, but the selling now looks like a consensus, according to Bob Gabele, director of insider research at First Call/Thomson Financial.
From mid-August to late September, for example, seven insiders at Applied Materials have sold 308,247 shares; two sold more than half their holdings. The sales are the biggest in any 30-day period since 1997.
At the Sanmina Corp., a contract maker of circuit boards, five insiders sold almost 200,000 shares in August. One seller, a director, cut his position 94 percent. In his first sale since 1996, Eric Lidow, chairman of the International Rectifier Corp., a maker of semiconductors for the power industry, sold 30 percent of his position.
"This tells me the shares in the group are probably ahead of themselves here," Gabele said. "The insiders all seem to think their shares have been bid up to unrealistic levels." |
