Investors See Chips Leading Broader Rally: U.S. Stocks Outlook
By Josh P. Hamilton
New York, Aug. 4 (Bloomberg) -- Semiconductor stocks this week posted their longest rally in almost five years, gaining 20 percent in seven days and buoying investor hopes for an end to the 16-month bear market in U.S. stocks.
The surge in chip stocks may presage a rally in the broader market, some investors say, because semiconductors are used in everything from cars to mobile phones. A rise in chip demand would indicate growth across other industries, they say.
``It looks like the market bottom we saw back in April will be the bottom for this cycle,'' said Alan Loewenstein, a manager of the John Hancock Technology Fund, which has 30 percent of its $1.1 billion in semiconductor and chip-equipment stocks. ``Investors still want to buy good growth companies and the valuations are not overly expensive.''
Intel shares now sell for 29 times the past 12 months' earnings, compared with 104 times a year ago. Micron Technology Inc., the biggest U.S. maker of personal-computer memory chips, has a P/E of 28, down from 80.
Still, reports showing lower-than-expected consumer confidence and industrial production limited the gains in the broader market. The S&P 500 rose 0.7 percent for the week, the Nasdaq Composite Index climbed 1.8 percent and the Dow Jones Industrial Average advanced 0.9 percent.
The S&P 500, still down 20 percent from its March 2000 peak, has gained 11 percent since touching a 2 1/2-year low on April 4. The Nasdaq has rallied 26 since early April, leaving the index down 59 percent from its record.
Chip shares surged after Merrill Lynch & Co. raised ratings on 19 chip and chip-equipment stocks and Intel Corp. Chief Executive Craig Barrett said the biggest chipmaker expects demand for computers to rebound the rest of the year.
Cisco Watch
Cisco Systems Inc., the largest maker of computer networking equipment, is scheduled to report quarterly earnings next week. ``If Cisco tells us that inventories are under control and they'll be buying more chips, that could get things rolling,'' Loewenstein said.
The Philadelphia Semiconductor Index rose 6.6 percent for the week, even after giving up 2.2 percent Friday. It is down 52 percent from its March 2000 peak. The seven-day rally ended Thursday was the longest for the index since November 1996.
Even some who doubt predictions that demand for telecommunications and computer-related goods will improve later this year acknowledge that semiconductor shares may be poised for a sustained rise.
``The chips are going to be the leaders,'' said Philip Orlando, chief investment officer for Value Line Asset Management Inc., which oversees $7 billion. ``We may not see a fundamental improvement in chip demand until second half of '02, but historically, those stocks rally even before their earnings bottom. If you believe the economy will revive, you have to buy now.''
While semiconductors may lead the way, Orlando said he's skeptical that other technology shares will be the biggest beneficiaries of a new bull market. Rather, he predicted a gain in a broader swath of the largest companies.
Money market mutual funds held $2.09 trillion dollars as of Wednesday, according to the website of the Investment Company Institute, a trade group for money managers.
When investors decide to shift back into stocks, managers will have to turn to the larger stocks because they're the easiest to buy and sell, Orlando said. He's been increasing investments in financial and health-care companies such as Loews Corp. and MedImmune Inc. as well as energy and retail shares.
To be sure, semiconductor rallies have proved short-lived in recent months. After soaring 48 percent between April 4 and April 19, the Philadelphia Semiconductor index has posted a series of retreats and advances, never regaining more than 61 percent of its year-ago value.
``Was this week's move in semis the mark of the bottom? Who knows,'' said Charles Crane, strategist for Victory SBSF Capital Management, which manages $4 billion. ``I'm not going to pin all my clients' portfolio hopes on the (general) remarks of a few folks, even the CEO of Intel.''
The Week
The semiconductor rally led to optimism for other technology shares expected to benefit if technology demand recovers.
Computer data-storage device maker Network Appliance Inc. rose 29 percent for the week, the second-biggest gainer in the S&P 500. Symbol Technologies Inc., the largest maker of bar-code scanners, advanced 18 percent.
Internet software company Inktomi Corp. rose 18 percent and Brocade Communications Systems Inc., the No. 1 maker of computer system switches, gained 16 percent.
Cooper Industries Inc. was the S&P 500's biggest gainer for the week, advancing 35 percent to $54.65. Danaher Corp., the maker of Craftsman tools, offered as much as $58 a share for the manufacturer of Halo lighting fixtures and Crescent wrenches.
Companies scheduled to report quarterly earnings next week include Procter & Gamble on Tuesday, Aetna Inc. on Wednesday and Berkshire Hathaway Inc. on Friday.
Preliminary non-farm productivity figures for the second quarter are due to be released by the U.S. Labor Department on Tuesday. The Labor Department also is scheduled to release a report on July wholesale prices Friday at 8:30 a.m. New York time. |
