Not a bad article:
individualinvestor.com
Semiconductor: When to Buy Falling Chip Stocks
(09/08/00)
Managing Editor: Joseph Radigan
The books closed on Summer 2000 barely a week ago, and already it's been a chilly fall for the semiconductor sector.
On Tuesday, Credit Suisse First Boston downgraded Intel (NASDAQ: INTC - news). A day later, Donaldson, Lufkin & Jenrette cut its rating on Micron Technology (NYSE: MU - news). Both actions sparked wider sell-offs among tech shares in general and semiconductor stocks in particular.
At a time like this, when chip stocks are so pricey - the Philadelphia Semiconductor Index is up 55% year to date - it's not surprising that shareholders are going to be a bit jumpy.
Chip shares did rebound on Thursday, but the sell-offs on Tuesday and Wednesday point to an extended period of volatility.
Phil Foreman, senior portfolio manager for the Evergreen Growth and Income Fund and the Evergreen Masters Fund in White Plains, New York, says investors will have to do some extra homework and stay on their toes if they're going to be ready to buy the right stocks on the inevitable sell-offs.
While Foreman still likes the business fundamentals of the semiconductor group, he's neutral on the sector given the high multiples of the shares.
``These stocks are expensive,'' Foreman says. ``It's not like this is an undiscovered area. You've got to buy these things when there's a little fear in the market.''
In the current edition of his market lexicon, ``a little fear'' translates into a drop of 40%. Although Foreman already owns semiconductor shares, a drop that's any smaller is not enough of an incentive to buy more.
Still, despite the nervousness of the past week, there's nothing to suggest an imminent downturn across the chip sector, says Steven Witt, a managing director with Firsthand Funds in San Jose, Calif.
``These companies are strong and doing very well, and we're confident about them,'' Witt says. ``But the single biggest problem is that investors treat all chip stocks the same. When the Street gets nervous, they throw them out as a whole. But there's nothing to suggest that Intel has lost its leadership mantle.''
Still, at these prices, Firsthand isn't adding to its Intel stake.
Like Evergreen's Foreman, Witt says Firsthand is using the sell-offs as buying opportunities.
``Generally, volatility is our friend,'' he says, so what happened to the chip sector earlier in the week was good news for Firsthand. The firm's analysts and portfolio managers are right in the heart of Silicon Valley. They make a point of staying clued in to the network of technology companies there. As long as Firsthand's mangers are confident of a company's business plan, they'll keep buying its shares even in the wake of a big drop..
Rick Billy, an analyst with SG Cowen in New York, also says that the long-term outlook for the chip sector is by no means getting worse.
Donaldson, Lufkin & Jenrette was worried about falling prices in the DRAM spot market, and its impact on Micron, but Billy says that although spot prices need to be monitored closely, they should recover in the next few weeks.
``Seasonally, the business is soft for the spot market in the summer, but it should be picking up'' Billy says. Spot prices of 128 Mbit DRAMs peaked in the $17.50 to $19 range and have since settled back to a slightly lower range of $17 to $18.25.
But past Labor Day, spot market prices should recover, and, according to Billy, there's a close correlation between spot prices and share values. That points to an October rally in chip shares, he claims.
``This should be a good entry point, and it should last for 18 months,'' Billy says.
Evergreen's Foreman thinks it may take a few quarters before a sustained rally materializes, but he's willing to wait for short-term trading opportunities as they materialize.
``The reality of it is that business is quite good for most semiconductor companies,'' Foreman says. But in the short term, there are a few trends in the industry that could keep a lid on stock prices.
One open question is the overall growth in the PC industry. If demand growth levels off, will that put a crimp in the growth of Intel and its chief rival Advanced Micro Devices (NYSE: AMD - news)? Corporate technology spending was strong in 1999 in advance of the Y2K rollover, but it slowed down in the first two quarters and has yet to return to its torrid pace of prior years.
In the meantime, corporate clients have shifted their technology spending to Internet infrastructure and e-commerce exchanges. Foreman wonders if this shift is diverting spending away from desktop PCs, but he says there's no proof that Intel is suffering because of it. The chip giant has also helped itself by diversifying its product line: Communications chips are now its fastest growing product segment.
Another open question is the expected seasonal resumption in European technology spending. With European consumers and business executives returning from their summer vacations, their technology spending should increase - at least that's what's happened in prior years. But it's too early to have a confirmation of that pattern this year.
Finally, Foreman thinks a rebound could be sparked by the new generation of chips being released by Intel and the latest version of Windows from Microsoft (NASDAQ: MSFT - news). As each generation of processors and operating systems gets more powerful, PC buyers typically snap up the latest products to take advantage of the extra horsepower.
There's enough evidence to suggest a new spurt of growth in the chip sector, but there's also plenty to be nervous about.
Keep in mind that the analyst who downgraded Intel on Tuesday, Ashok Kumar of U.S. Bancorp Piper Jaffray, was still bullish on the stock back in July after Salomon Smith Barney had itself downgraded the chip sector.
Back then, Kumar said that semiconductor demand was ``much broader and more durable than in prior cycles.'' But how quickly things turn sour. Just seven weeks later, Kumar's downgrade was based partly on weak demand for Intel's products.
Evergreen's Foreman says an oversupply is what normally leads to a cyclical downturn in the chip sector. What's more, at this point in the chip business cycle new manufacturing capacity should be coming on line, but at this stage of the game, it hasn't happened yet. Still, he's looking over his shoulder for word of new chip plants being built. If that happens, then it points to price pressure for the chip-makers and could spark a cyclical slump.
In the meantime, he's fairly bullish and will hold on to the chip shares he already owns. Near-term, he'll wait for a sharp sell-off before he adds to them.
So what does he like? Well, no surprise here, Foreman is an Intel fan. But he also likes Texas Instruments (NYSE: TXN - news) and two other stocks that should be familiar to regular readers of this Web site: Vitesse Semiconductor (NASDAQ: VTSS - news) and Triquint Semiconductor (NASDAQ: TQNT - news).
Firsthand's Witt says he's also very bullish on Vitesse, but he also likes Transwitch (NASDAQ: TXCC - news) and Zoran (NASDAQ: ZRAN - news) , both of which specialize in communications chips.
Bottom Line:
Expect the volatility to continue, but do your buying on the inevitable, but temporary, sell-offs. It could be a profitable strategy until the momentum returns to the group as a whole.
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