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ANALYST WATCH: PLD stocks leading chip rally

Analysts were poring over their charts and making calls this week in the hopes of discerning whether or not the red-hot chip sector has the legs to plow through the historically slow spring and summer months.

Have an opinion on this?

By an overwhelming majority, chip analysts are expecting this terrific rally to continue for the foreseeable future, past performances be damned.

All the excitement surrounding the much ballyhooed Palm IPO overshadows the fact that somebody has to make all the chips that make these wireless devices possible.

Take a gander at Cisco's stock chart for the past five or 10 years if you need to be reminded of the money that's being made here.

PLD demand on the rise

For telecom and networking companies, it's all about speed. Speed in terms of bandwidth and speed in getting new products into customers' hands.

That's why programmable logic device (PLD) makers such as Altera (Nasdaq: ALTR), Xilinx (Nasdaq: XLNX) and even Actel (Nasdaq: ACTL) are going like gangbusters these days.

"Traditionally, design engineers would choose ASICs over PLDs even though PLDs have some significant advantages," said Rick Owens, an analyst at D.A. Davidson. "But PLDs were much more expensive. Those costs are now decreasing."

When designing these complicated chips for routers or Palm Pilots, engineers want to be able make adjustments on the fly without having to start from scratch. It shortens the product development phase and saves money at the same time.

So it's no wonder that analysts upgraded or raised price targets on the likes of Altera and Xilinx this week.

Deutsche Banc Alex. Brown analyst Erika Klauer resumed coverage of the Altera with a "strong buy" rating this week and set a 12-month price target of $90 a share.

Chase H&Q's Sudeep Balain placed Altera on his "buy-focus" list and Salomon Smith Barney raised its 12-month price target from $80 a share to $100.

Altera shares surged to a 52-week high of 85 3/8. Not bad considering the stock was perched at 24 3/16 in March. In between, there was a 2-for-1 stock split in May.

Those strong recommendations pulled Xilinx and Actel higher as well. Xilinx shares hit a 52-week high of 84 1/2 this week, up from a 52-week low of 16 7/16 set last March. It's split 2-for-1 twice in between.

And even Actel, clearly the "value" play in the PLD sector, scampered up to a new high of 35 5/16.

For those of you who still believe in fundamentals, Xilinx is carrying around a price-to-earnings ratio of 117 while Altera and Actel are trading at 78 and 47, respectively.

Perhaps a bit high, but certainly not the insanity that is most Internet stocks these days.

"I think (PLD stocks) are due for a little sideways move," Owens said. "But the outlook for the industry is bullish. 1999 was a major new design year. That's where this bullishness is coming from."

Judging from the recent run-ups made by Intel (Nasdaq: INTC), Rambus (Nasdaq: RMBS) and Micron Technology (NYSE: MU), it's clear that PLD makers aren't the only chip companies inspiring investors.

"Pretty much, out of the semiconductor companies, I pretty much like all of them," said Dan Niles, an analyst at Robertson Stephens. "All of them have been great performers, so it's been the right place to be. The Philadelphia Semiconductor Index in 1999 was up 101 percent. I think any investor would be happy getting that performance from the index."

The lone pessimist

With every feel-good story on Wall Street, there always has to be that one analyst that feels compelled to look at the glass as half-empty.

Needham & Co.'s Tad LaFountain has an "avoid" rating on Altera, despite its spectacular sales and earnings growth in recent quarters. "Avoid" is a tactful way of recommending that investors sell the stock.

Maybe he knows something that no one else does, because 24 of the 27 analysts tracking Altera rate it either a "buy" or "strong buy."

LaFountain also cut Lattice Semiconductor Corp. (Nasdaq: LSCC) from a "buy" rating to a "hold" this week. Lattice, of course, bought Vantis, AMD's PLD unit, and has since watched its stock take off.

After LaFountain cut the stock, it fell 6 percent Thursday.

LaFountain didn't return calls to comment on his contrarian outlook but if history is any indicator, it might be a great time to start buying shares of Altera and Lattice.

Back in December, LaFountain wasn't terribly excited about Intel when it was trading at $79 a share.

"It made a heck of a run through the third quarter but it's basically back and filled since then," LaFountain said at the time. "Right now I have a "hold" rating on the stock. I think the fourth-quarter estimates are a little too high."

Well, we all know the rest of the story.

Since reiterating his "hold" recommendation on the stock, Intel went on to shatter analysts' estimates by 6 cents a share in the fourth quarter, drawing rave reviews for its profit margins, diverse product mix and, of course, its stock performance.

Since that fateful day in December, Intel shares are up more than 43 percent.

In LaFountain's defense, Intel was coming off a couple of shoddy quarters, by Intel standards. LaFountain was also one of the few analysts supporting Advanced Micro Devices (NYSE: AMD) in its dark days. AMD eventually turned up, but not after some rocky quarters. Through it all LaFountain maintained a "strong buy" rating.

If you had "held" Intel shares you'd still be sitting pretty.

But why not a "buy" recommendation like the vast majority of analysts?

Investors only wish the stock market was as predictable as a horse race. But if you believe in past performances, it might be wise to "avoid" LaFountain's advice and get your hands on shares of both Altera and Lattice.