The Return of the Chip Sector
By Monica Rivituso
WITH ALL THE talk lately about the virtues of defensive investing, the last thing you might expect to see is a red-hot technology sector. But from the looks of things, semiconductors are about as hot as it gets right now.
Sure, the entire stock market has risen nicely over the last month. But chip stocks have left the broad market gauges in the dust. Since the beginning of October, the Philadelphia Semiconductor Index has risen 39% to 520, compared with the respective 7.5%, 8.4% and 22.4% increases in the Standard & Poor's 500, Dow Jones Industrial Average and Nasdaq Composite. For an industry that's been weighed down by lackluster demand, an inventory overhang and a sickly macroeconomic environment, the chip sector has demonstrated impressive resilience of late. What gives?
For starters, say analysts, investors have been responding to some indications — however slight — that the chip business isn't getting much worse. That's not to say things are great, mind you, but rather that the pace of deterioration is slowing. World-wide chip sales for September (the latest data available) fell 44.6% from a year ago to $10.22 billion. That's bad, no doubt. Yet despite the lousy year-over-year number, the pace of month-over-month sales deterioration slowed for the third month in a row — from a 6.1% drop in July to a 3.5% fall in August to a 2.5% slide in September. Investors are clinging to this glass-is-half-full trend as a sign that the bottom is near.
Something else luring investors to chip stocks is the fear of missing their rally. Chips are notoriously cyclical. When the industry's in a downturn, it's ugly, to be sure. But come the upturn, shareholders can be richly rewarded. ``A lot of investors are afraid to own these stocks at these levels, but more are afraid not to own them,'' says Scott Randall, a Wall Street Journal All-Star analyst from SoundView Technology.
Question is, should people be dipping their toes in now, when many of these stocks are sporting obscene multiples? Consider that Intel (NASDAQ:INTC - news) trades at a forward price/earnings ratio of 46 and a price/earnings growth, or PEG, ratio, of 3.3, according to Zacks Research, compared with the S&P 500's forward PE of 20 and PEG ratio of 1.9. And Altera (NASDAQ:ALTR - news) has a P/E of 88 and a PEG of 3. But while some valuations are rich, Hans Mosesmann, a Wall Street Journal All-Star from Prudential Securities, warns that the lows for these stocks have probably passed. ``If you're an investor in technology, you have to buy on the pullbacks,'' he says.
Whether or not this chip rally is sustainable is, of course, the $64,000 question. In the end, there's no hiding from the broader economic climate, which is certainly precarious. But if the economy doesn't take another nasty turn before the stimulus of lower interest rates, tax cuts and government spending finally makes itself felt (and that's still a pretty big ``if''), analysts expect chip companies to start recovering in the middle of next year.
Brian Matas, vice president at market-research firm IC Insights, says that while year-over-year sales comparisons won't improve until the third quarter of 2002, quarter-over-quarter improvement should begin in the first quarter. He thinks the industry will post single-digit sequential growth for the first and second quarters. In the third and fourth quarters, world-wide sales should increase 13% and 17%, respectively, on a quarter-to-quarter basis (and 17% sequential growth would be the best sequential improvement in the industry's history, according to IC Insights).
It should be pointed out that even those heady numbers would leave 2002 roughly flat with this year in terms of sales. But Matas and others consider next year the first leg of a major upcycle. If 2002 will see gradual recovery for chip makers, 2003 and 2004 should be more robust, as demand for things like PCs and cell phones improves, albeit not at the robust pace of previous years.
Still, even investors who are confident of an upturn and can withstand the volatility of this sector might want to wait until these names sell off a bit. Stocks rarely move in a straight line up or down; there's usually a bit of zig and a touch of zag around the general trend. Waiting for these hot stocks to cool a little could make them easier to handle. |
