Analyst sees green in chip carnage
Salomon Smith Barney's Jonathan Joseph is the first chip analyst to advise investors to get back into the sector. He was also the first to tell them to get out near its peak.
Joseph, whose upgrades lifted the likes of Micron Technology, Intel, Xilinx and Applied Micro Circuits to double-digit gains in early afternoon trading, predicted the bottom for battered chip stocks is "only months away," though he offered very little specific evidence to back up his bold claim.
In fact, chip stocks are the main reason the Nasdaq composite is up 52 points after Tuesday's triple-digit jump.
Joseph raised the entire sector to an "outperform" rating and bumped up leaders such as Micron, Intel and Texas Instruments to "buy" recommendations largely "based upon anecdotal order and shipment data that is so bad it cannot continue for long and sector data that suggests a fundamental bottom is only months away."
This call comes just two days after Lehman Brothers analyst Dan Niles cut estimates for Intel, TI and Cypress Semiconductor and predicted total chip sales would fall between 18 percent and 20 percent from 2000's record-breaking level.
While Joseph didn't nail the bottom spot, he came close.
"We're still holding off," he said. "We're not as bullish as Salomon Smith Barney right now, even though we are seeing a lot of this inventory, especially in the DRAM (dynamic RAM) business, burning off. The bottom probably is nearer than it's been in the past six months."
Why take sides?
At first glance, Lehman's Niles and Salomon's Joseph would seem to be at odds considering one analyst is raising ratings on the sector while the other is cutting earnings estimates.
But the truth is, they're both saying the same thing--just in different ways for different audiences.
"I think Niles is advising those investors who got into these stocks in the past few months to sell into chip rallies like we're seeing today because things are only going to get worse in the second quarter," Chaney said. "Joseph is saying that the bottom is close, and investors should either hold the stocks they have or buy a few selective ones in anticipation of a recovery later this year."
Joseph, despite his sweeping upgrades, makes no bones about the fact that sales and earnings for even the biggest chip and chip-equipment makers are going to be lousy for the next few quarters.
"Never in our experience have we heard stories of prominent semiconductor makers reporting no net bookings in the quarter, shipments for good, if not great, component suppliers falling 50 percent quarter on quarter and distributors reporting a 65 percent sequential decline in demand," he wrote in the research report.
Now it's up to investors to decide if Joseph's recent success in calling the pinnacle will translate into similar success on the way back up.
And if they think he's right, they should also be prepared to swallow another 20 percent or 30 percent decline just in case he's a bit premature.