JP Morgan Expects A Selloff In Semiconductor Sector

JP Morgan's Semiconductor team notes recent checks in the semiconductor space indicate Consensus estimates need to be lowered for 2Q07 and 2007. They believe this will cause a sell-off in semiconductor stocks, which the firm believes will be the last chance to buy stocks before the second half rally.

The firm compared their 2Q07 and 2007 estimates to Consensus for our large-cap and broad-based stocks, and it appears Consensus estimates are an average of 1% above their estimates for 2Q07 and only slightly below normal seasonality. They believe Consensus estimates are too optimistic and are based on a "quick recovery" scenario in 2Q07.

Consensus estimates should be reduced over the next four weeks as it becomes clear 2Q07 guidance will be below normal seasonality. JPM believes this should also mark the last major estimate cut for the semiconductor sector. Analysis indicates AMD, CY, INTC, and ONNN should experience the largest estimate cuts, while TXN, BRCM, ALTR, XLNX, and FCS should experience smaller reductions.

Firm believes the lowering of Consensus estimates should trigger a sell-off, and they strongly encourage investors to begin or add to long positions during the weakness. They believe this is last chance to buy before stocks rally in 2H07. Top Picks include: TXN, MCHP, BRCM and NVDA.

Notablecalls: Agree with JPM here. The consensus numbers have been rising on heels of positive comments from several industry names. The truth, however, is that the U.S. economy has entered a period of choppy growth (at best! more likely slowing growth and eventually deceleration) and Semis have rarely done well during times like this.

The HOLDRS (SMH) have gone nowhere over the past 6 months and I suspect the next leg will be down.

Comments

[CrossProfit]

Fair enough.
Reason/s for overestimates are somewhat lacking in content (JPM article, not yours).
See CrossProfit comment on this article in January 2007;

chip.seekingalpha.com/...

Until tech issues are resolved, PCs get hit with a double whammy. 1) Slower economy with no help from Vista 2) customers, both corporate & private, need to know they are getting a standard that will be around for a few years. Without (WiMax?) wireless built-in it's almost like trying to sell a system with an 8" disk drive. There is way too much confusion out there, so consumers are letting the dust settle.

CrossProfit
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[Malkiel]

Agreed with article and Crossprofit, except that I'm dubious about a big second-half for tech this year--maybe next year. There are a lot of catalysts building but not in play yet; Apple will capture pc desktop share from Windows providers, but it will be a slow process; INTC and AMD will quickly leapfrog to quad- and other advanced chip configs, but software writers will be slow on the uptake; convergence of computer and net with tv space is still missing some pieces, but not by much; music industry, radio, and sat radio are all confused about how to play the game. Good buys made this spring are more likely IMHO to see fruition in 08...