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It’s time for semiconductor investors to play defense, according to Morgan Stanley’s Mark Lipacis.

This morning, Lipacis noted that days of inventory at both OEMs and distributors moved higher in the September quarter; in particular he notes that communications equipment OEMs have about 20% higher inventory than normal, while distributor inventories remain “above normal levels.” His advice is to move into semis with “more defensive characteristics.”

In a research note, Lipacis asserted that chips stocks in the current downturn are likely behave similarly to the 2001-2003 periods, “when semiconductor stocks with defensive characteristics outperformed during both the down cycle as well as the first leg of the up cycle.”

Lipacis shifted ratings and cut estimates on a number of stocks this morning:

  • Analog Devices (NASDAQ:ADI): Upgraded to Overweight from Equal Weight; target to $25 from $27; ‘08 to $1.70 from $1.73; ‘09 to $1.49 from $1.60.
  • Altera (NASDAQ:ALTR): Downgraded to Equal Weight from Overweight; target to $19 from $22; no change in estimates.
  • Broadcom (NASDAQ:BRCM): Downgraded to Equal Weight from Overweight; target to $14 from $16; ‘09 EPS to 55 cents, from 62 cents.
  • Linear (NASDAQ:LLTC): Upgraded to Overweight from Equal Weight; target to $24 from $25; ‘08 to $1.73 from $1.77; ‘09 to $1.40, from $1.55.
  • Lattice (NASDAQ:LSCC): Downgraded to Underweight from Equal Weight; target to $1.80 from $2; no change in estimates.
  • PMC Sierra (NASDAQ:PMCS): Maintains Overweight; target to $6 from $9; ‘08 to 39 cents from 41 cents; ‘09 to 33 cents from 41 cents.
  • RF Micro (RFMD): Downgraded To Underweight from Equal Weight; sets $1.50 target; ‘09 EPS to 17 cents, from 19 cents.

Among the upgraded stocks (prices as of 12:35pm ET):

  • Analog Devices is up 37 cents, or 1.9%, to $20.01.
  • Linear is up 34  cents, or 1.6%, to $21.45.

Among the downgraded stocks:

  • Altera is down 24 cents, or 1.6%, to $14.98.
  • Broadcom is down 47 cents, or 2.95%, to $15.47.
  • Lattice is down 1cent, or 0.6%, to $1.60.
  • RF Micro is down 14 cents, or 9.6%, to $1.32.
  • PMC Sierra (not downgraded, but big target and EPS reductions) is down 25 cents, or 6.1%, to $3.77.
Source: Time for Chips to Play Defense - Morgan Stanley