From TheStreet.com.."Silicon Valley: Jumping Off the Semiconductor Train
By Marcy Burstiner
Staff Reporter
11/25/98 11:41 AM ET
SAN FRANCISCO -- Just two months ago, semiconductors were the untouchables of the tech world. Now investors who bought chip stocks before the rally began in early October are in the enviable, if tricky, position of trying to determine when many of their chip picks will finally top off.
It's a tough call for holders of three stocks in particular. If investors have been flocking to the chip sector, they have been barreling toward QLogic (QLGC:Nasdaq), Texas Instruments (TXN:NYSE) and Intel (INTC:Nasdaq). These companies lead in three growing chip markets -- QLogic for interface chips, TI for digital signal processors and Intel for server and personal computer chips.
The shares of all three are hitting the stratosphere. Take QLogic, an often-overlooked company with an average daily volume of just 149,000 shares. QLogic makes chips that allow disk drives, CD-ROMs and computers to communicate with each other. Its shares have risen 115% since the equity market bottomed out on Oct. 8, outpacing the S&P 500's 23% rise in the same period. The stock was trading today at 114 1/4.
Shannon Vanderhooft, a portfolio manager at Numeric Investors, has been long QLogic since February. She's long liked the company's steadily strong earnings, but had to wait months before others took to the stock. QLogic has beaten the Street for seven quarters running, most recently by 14 cents a share. "It just turned out that over the summer the market didn't care much," she says. "Now it's just breaking out."
Vanderhooft says she's trimming her holdings because the stock is starting to look a little expensive. Since funds that suddenly back out of a stock can leave an ugly crater in its stock chart, some managers are opting to trim their holdings in a number of chip stocks even as they rise. But the question, as always, is getting the timing right. "If the earnings keep going up, who is to say how high it will go?" Vanderhooft says.
TI is one of the highflying chip stocks that fund managers think isn't overvalued yet. "I think it has a chance to be a very big stock over the next three years," says Trent May, a portfolio manager with the $810 million Invesco Growth fund. TI has risen 23% since May bought it three weeks ago at 63. It's up 64% since Oct. 8 and was trading at 76 5/8 today.
Texas Instruments already holds a 45% market share in the growing market for DSPs, or chips that run a wide range of electronic devices such as cell phones. That share could increase to 65% within the several years, says BancBoston Robertson Stephens analyst Daniel Niles. Last week, Niles upped his rating on TI to strong buy from buy and his price target to 100 from 75. (Robertson Stephens is not an underwriter for Texas Instruments.)
While May hangs on to TI, he has been trimming Intel, a stock he has held since 1996. Intel is up 43% since Oct. 8 and was trading around 112 today. But even mighty Intel will likely face problems next year. The company is producing new chips for high-end and low-end PCs alike, a switch from its tactic of moving old chips down the PC-price chain as it produces new ones. In doing so, Intel has started competing with its own chips.
May says Intel's ability to maintain its momentum will rely on either growing market share or EPS rising to $4.50 for 1999 -- 27 cents above the First Call consensus, and a 24% rise above the consensus $3.41 EPS for 1998. "I'm not willing to make that bet," May says, adding that he sold some Intel shares Thursday.
The most unattractive thing about the bellwether chip stocks is their valuation. Intel's price-to-earnings ratio stands at 34, while TI's is at 45 and QLogic's is at 56 -- all above the S&P's ratio of 27. Analysts are starting to balk at such valuations. On Friday, Prudential Securities analyst Hans Mosesmann downgraded Intel to accumulate from strong buy even as he boosted his price target to 130 from 120. The same day, ABN Amro downgraded TI to hold from buy, citing the stock's high valuation.
Still, there's something to be said for not backing out too fast. Todd Investment Advisors, which manages $3 billion and doesn't play much in the chip sector, has stuck with Intel since 1995. "We were glad to see that come back from 70," says Curt Scott, a portfolio manager with the firm.
If only Scott had been as patient with the only other chip stock he's held recently. He sold QLogic in July at about 60. That's got to hurt. " |
