'Kurlak Effect' Hurts Chip Stocks
As Analyst Warns of Sector Slump
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- Semiconductor stocks weakened Wednesday after Merrill Lynch & Co. analyst Thomas Kurlak warned that the recent rally in the sector couldn't be sustained.
The Philadelphia semiconductor index slipped 1.86 to close at 305.01, underperforming the broader technology sector. The Nasdaq Composite Index lost 0.49 to 1708.55, while Morgan Stanley's high-tech 35 index added 2.63 to 509.22.
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Both the Nasdaq and the semiconductor index have rallied since the start of the year, recovering from a drop at the end of 1997. Late last year, as several Asian economies looked close to collapse, chip stocks were hit by fears of order slowdowns and the effect of widespread currency devaluations.
Several analysts agreed with Mr. Kurlak that many stocks in the sector have gotten ahead of themselves -- without any fundamental change in the industry.
To be sure, the Philadelphia index has jumped about 30% over the past month, but is still about 23% below the high it reached at the beginning of October as troubles in the Asian economies deepened.
"I'm always trying to downplay the 'Kurlak effect,' but unfortunately I kind of agree with him at the moment," said Scott Randall, an analyst at SoundView Financial Group Inc.
Business fundamentals for the semiconductor stocks could get worse before they get better, he said. "We haven't seen yet the full impact yet from weaker demand in Asia or the effect of more aggressively priced goods coming in from Asia."
Charles Boucher, an analyst at UBS Securities, also said much of the recent rally hasn't been warranted, given industry fundamentals. He said he was especially concerned about some of the companies making memory chips, such as Micron Technology, because it remains unclear when DRAM -- or dynamic random access memory -- prices will rise from currently depressed levels.
Micron added 3/8 to 37 3/8 on Wednesday, well above the 52-week low of 22 it hit in December. Micron trades on the New York Stock Exchange.
For the near term, investors would do well to buy stocks based on individual fundamentals rather than on sector conditions, said James Barlage of Salomon Smith Barney. He is recommending Texas Instruments because he thinks the worst of the carnage in the DRAM sector is over and the company has a strong position in the fast-growing communications-chip sector. He also recommends Intel, because the company is entering a new product cycle that should boost revenues on higher-margin chips. Texas Instruments managed to buck the market's fall and add 5/8 to 56 3/8 in Big Board trading, while chip giant Intel shed 1 3/16 to 85 1/16 on Nasdaq.
Mark Edlestone, an analyst at Morgan Stanley Dean Witter, said it may be time for semiconductor stocks to "take a breather." But he added that he believes semiconductor stocks may have sold off too much at the end of last year, and said he remains optimistic about the sector over the course of the year.
"Since the end of the second quarter [of last year] we saw consensus earnings estimates drop by about 15%, yet we saw the stocks down 40% between the summer and the end of last year," he said, noting that therefore "the stocks were already discounting a lot of the bad news." Earnings this year will be lower than what analysts had expected at the beginning of last year, but there should still be earnings growth in the industry, and he recommends selective buying.
"The first half of 1998 is setting up to be a great long-term buying opportunity for some of the better franchises," he said. His list of recommended stocks includes Intel and two communications-chip companies, Lattice Semiconductor and Xilinx.
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