Beware the Semiconductor Rally - Barron's

Until last Thursday, the semiconductor sector had posted an incredible rally, gaining nearly 20% in just seven sessions. From Nov. 20 through Wednesday's close, the Philadelphia Semiconductor Sector Index had rallied an impressive 33%. But Barron's Eric Savitz warns investors that the chip rally is likely to crumble sometime soon.

There are definite signs of improvement in the industry. Several companies have recently raised their March-quarter guidance, including Xilinx (XLNX), Diodes (DIOD) and Taiwan Semiconductor (TSM). Almost every chip analyst has seen evidence of demand stabilization.

But until end demand improves, a lasting recovery is unlikely. Semiconductor firms can accelerate production all they want, but will just be left with growing inventories if demand for PCs, phones, routers and other electronics goods doesn't pick up. Additional buying at this point is being driven largely by inventory restocking.

Auriga USA analyst Daniel Berenbaum says the rush to call the bottom "effectively ignores continued deterioration in demand," and that Wall Street has gotten too bullish, too quickly on chip-equipment stocks. Berenbaum's top short idea is Intel (INTC), while Applied Materials (AMAT) has "the potential for further downside."

Like Berenbaum, Avi Cohen, of Avian Securities, also doesn't see any evidence of an improvement in end demand. Morgan Stanley analyst Mark Lipacis advises selling into the rally. Lipacis notes part of the demand pickup beyond inventory restocking has been from China's rural economic stimulus program, but that the Chinese distribution channel may be building inventory too rapidly as well. He expects Advanced Micro Devices (AMD), Nvidia (NVDA) and RF Micro Devices (RFMD) to all lose money in 2010. Lipacis also suggests taking profits in Broadcom (BRCM) and Marvell Technology Group (MRVL) which trade at overly rich PE ratios.

Comments

[Sch:]

For every " analyst" that is negative on tech and Semi stocks there are some who are positive on the sectors. Why don't you now comment on them to balance the damage done to these markets by the people who are guesssing bad things and ignoring any positive signs ?
I have been in the market for many, many years. It's been my experience that the majority of "analysts" are wrong more than they are right, and some are outright charlatans.
I also think it's indicative of fraud that most of them refuse to state their positions in stocks they comment on.

Mar 22 01:18 PM

[Smart1:]

"But until end demand improves, a lasting recovery is unlikely."

Surely you can come up with something more insightful than that....

By the way of the 41 analysts that cover Intel, 12 rate it a strong buy, 11 rate it a buy, 16 rate it a hold, only 1 rates it an underperform and only 1 rates it a sell. So 39 out of 41 say keep it or buy more, 12 of them say buy a lot more.

How are articles like this allowed to be published, completely devoid of any research or thought? Barron's used to provide insight and valuable knowledge about the financial world. Unfortunately, it has deteriorated to reporting unbalanced rumors and baseless conclusions. This kind of irresponsibility is why I am no longer a subscriber.

Mar 22 02:24 PM

[Smart1:]

One more thing I can't resist. The comment about inventory restocking is total BS. No systems company (even phone mfrs) stock microprocessors or memory chips or any other components because of the constant downward pressure on price (as new, better parts become available). Consequently those parts can depreciate very quickly. I would bet my house that major PC manufacturers maintain 2 days max of microprocessor inventory and maybe 3 or 4 days of memory chips. This well known fact makes your restocking comment makes the restocking comment ridiculous and unfortunately reveals how much you know about the industry.

I realize some percentage of those components are sold through distribution but the vast bulk are sold directly to OEM's.

Mar 22 02:32 PM

[Jeez:]

For once the "comments" make more sense than the article itself. However, the author is just being provocative and contrarian and is "scared" by the fact how much these stocks have come up since Nov. BUT that assumes that there was any rationality in the markets in Nov.

Mar 22 02:37 PM

[Sch:]

For years some Analytical companies have been promoting AMD versus Intel. Noitably Freedman. Bllings, Ramsy, American Technology, Stiffel, Nicholous, and JPM, among others.
Many times after reading their comments I have asked them for some disclosure on these two stocks..
I never receive an answer. Obviously, they are hiding the reasons for their "analysis", and I feel the reasons might disclose something nefarious.
The SEC should insist on an Analyst making disclosures on their ownership of stocks they are reporting on. Problem with that is the SEC is composed of do nothing people.

Mar 22 04:04 PM

[TJB:]

I'm not convinced Intel is a buy right now but any analyst(Berenbaum), who's "top short idea" is Intel in the low teens should be taken with a grain of salt.

Mar 22 04:15 PM

[Awenshok'09:]

When will we demand that these 'analysts' step out from behind their legal immunity and, along with journalists, are required to publish their complete track records, including dates, entry and exit points AND their educational and related work experience so investors can determine if the authour is some former coffee-getter or someone with a real understnding of the company/industry on which they're commenting as well as SUCCESSFUL investment history?
Note to blogs/editors/publishers and writers/analysts: Enuff crapola.

Mar 22 04:53 PM

[BxCapricorn:]

Semi-conductors. A whopping 20% gain. They only have another 90% to go, to get back to where they were in December. All these industrial sectors are "dead men walking". I wrote off my investment in them long ago, which is why I laugh (not giggle, like a little girl) at the very notion that "something is brewing" in chips.

Mar 22 06:08 PM

[pocono:]

i was in best buy, staples, and radio shack lookin for modems with wireless routers and best buy had one--and only one, rest were backoreded. lots of empy shelves!

Mar 22 06:16 PM

[pocono:]

ive been finding lately that the majority of analysts are dead wrong! create panic selling! upgrade or downgrade after the fact and the stock goes the opposite way!!

Mar 22 06:20 PM

[stox:]

listen to analysts ... you are dead meat.

does warren buffet listen to these analysts before buying or selling his stocks?

Mar 22 09:24 PM

[John Foulden:]

It never ceases to amaze me that no one ever considers tha manufacturing capacity of Intel and AMD, AMD can never take more than about 20% market share as they simply do not own enough capacity and no way on this earth can thay buy enough competatively from foundries. So much for analysts
AMD should have stayed in comms and flash chips and made a proffit instead of eating investors cash pursuing unachievable aims


On Mar 22 04:04 PM Sch wrote:

> For years some Analytical companies have been promoting AMD versus
> Intel. Noitably Freedman. Bllings, Ramsy, American Technology, Stiffel,
> Nicholous, and JPM, among others.
> Many times after reading their comments I have asked them for some
> disclosure on these two stocks..
> I never receive an answer. Obviously, they are hiding the reasons
> for their "analysis", and I feel the reasons might disclose something
> nefarious.
> The SEC should insist on an Analyst making disclosures on their ownership
> of stocks they are reporting on. Problem with that is the SEC is
> composed of do nothing people.

Mar 23 06:52 AM

[basehitz:]

Spring 2002 IBD published an article on apparent chip recovery cycle underway based on an uptick in orders. Very similar to what we have now. In 2002, we were coming off an overbuilt industry. Not the case today. But today we have a deby overhead > 350% GDP. It has never been that high. Never. The only time it was close was . . . 1929. Since 2002, we've added nearly 100% GDP in debt. Lack of overbuild this time helps, but the already overburdened debt dampens real recovery. And Washington policies could trump either of these 2 factors, which could help or hurt. Point is, we are in unchartered territory both in terms of debt level and policy actions. Where this goes is not knowable. But in 2002 many bought the head fake of inventory restocking. I was one. Chips had a lot of fall before it was over. No one believed it back then either.

Mar 23 09:20 AM

[canadajunkdog:]

Beware the short sell liars. They desperately hope for another fear campaign to stall the uptick. She's all uphill from here!!

Mar 23 10:09 AM

[Spook:]

Its because most of the branded company start putting a brake on production order in October 2008, too much inventory back then as the market start to go down in July 2008 (seekingalpha.com/artic...).

At this moment, everyone is ordering for re-stocking purposes, the increase in sales and growth in materials and semiconductor order may be a short term recovery, as everyone is still cautious in order more than what they can sell.


On Mar 22 06:16 PM pocono wrote:

> i was in best buy, staples, and radio shack lookin for modems with
> wireless routers and best buy had one--and only one, rest were backoreded.
> lots of empy shelves!

Mar 23 11:57 PM