Goldman analyst Terry Ragsdale added Intel, Analog Devices and Maxim Integrated Products to its "recommended list," and upgraded Linear Technology to "market outperform" from "market perform." And his fellow analyst Nathaniel Cohn upgraded Broadcom, Conexant, Microtune and Qualcomm to the "recommended list."
Ragsdale was fairly forthright in his research note, telling investors to "buy chip stocks now."
"The call on semiconductor stocks is as tough as it has ever been. We believe the recovery writing is on the wall: Fundamentals already look modestly better in a few areas and we anticipate more positive signs between now and year end," he wrote in a research note.
All the upgraded stocks were higher in morning trading, with Microtune rising $1.75 to $20.10, and Conexant up 71 cents to $10.20. According to the CNET tech indexes, semiconductor and chip equipment stocks were modestly higher in early trading.
Ragsdale said he wasn't so much moved by an abundance of good news, but rather, a lack of bad news.
"For the past couple of quarters nearly every data point has been negative. In July, there were a bunch of at least non-negative, and maybe positive points," he said.
For instance, he pointed to Texas Instruments' recent comments that cancellations were lessening and that its analog business could see growth in the fourth quarter.
And the chip companies are selling fewer products to their customers than the customers are using, as companies work through excess inventory. The inventory correction will "probably come to an end before demand takes off. So even if demand isn't wonderful, chip guys will look good," he said.
By the time the fourth quarter, which is seasonally one of the strongest, rolls around, the chip sector will have had three to five quarters? worth of an inventory correction, he said. "I don't think I'm smart enough or have solid enough data to pinpoint when it will end, but three to five quarters is long in the tooth for an inventory correction."
Of course, as always on Wall Street, not everyone agrees. Lehman Brothers analyst Seth Dickson said in a research note Monday that the upbeat comments from companies like Texas Instruments are not "new news."
"Street estimates for the second half of the year are too high," he wrote in a research note. "Although the third quarter may turn out to be the bottom quarter in terms of revenue, we might see somewhat of a disappointing recovery in the fourth quarter as companies deal with pricing pressure (even in high-performance analog), weaker than expected IT and consumer spending, and worsening economic conditions in the overseas markets."
Investors can be forgiven if they think they've heard this tune before. Wall Street has been playing dueling analysts with regard to the chip sector for weeks now, with Merrill Lynch and Salomon Smith Barney coming down on the "can't get any worse" side, and Credit Suisse First Boston weighing in on the "sure it can" side.
Ragsdale acknowledged that the back-and-forth "keeps it entertaining." He put the debate down to a question of which is more important to an investor, spotting the bottom or weighting a stock's worth.
"What I'm saying about positive data points is not unique. A lot of people have recognized positive data points. But valuations are nowhere near what they ought to be in the cycle based on norms," he said. "It's a fight between do you want to buy what looks like modest fundamental turn, or say, ?That's just not (worth it) given valuations??"