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.