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Chips lead tech rally
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April 11, 2001: 4:31 p.m. ET
Analyst upgrades spark broad-based tech stock buying binge
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NEW YORK (CNNfn) - How much worse could the chip business possibly get? Not much, according to an influential Wall Street analyst who upgraded his rating on the semiconductor sector.
Jonathan Joseph of Salomon Smith Barney, who was among the first analysts to forecast a downturn when he downgraded the chip sector last summer, reversed that call Wednesday, raising his sector rating to "outperform" from "neutral."
In recent months, scores of chipmakers have ratcheted down their quarterly sales and earnings targets as they faced deteriorating end-market demand and slowing order rates.
The semiconductor industry historically has been characterized by boom-and-bust cycles, with periods of undersupply and high prices followed by spells of overcapacity and slumping profitability. Industry executives and analysts typically have been able to estimate when the ups and downs would come, and adjust their business plans and forecasts accordingly.
But the most recent downturn came much more swiftly and suddenly than similar slowdowns in the past, catching many in the industry and on Wall Street by surprise.
The latest chip company to warn of weaker sales and earnings, Cypress Semiconductor (CY: Research, Estimates) said Tuesday that virtually all the orders it booked in the most recent quarter were offset by cancellations. Cypress shares gained $1.31 to $17.66 Wednesday.
Joseph told CNNfn's Market Call Wednesday that such weakness is a clear signal that the sector is nearing the bottom of the current downcycle and poised for an upturn. (246K WAV) or (246K AIFF)
He added that the glut of inventory, especially for PC-related chips, appears to be burning off.
"We've seen some reduction, or certainly tightening, of PC component inventories over the past couple of months, particularly in Taiwan, where most of the assembly goes on," he said. "We think that's going to spread to the other groups."
In addition to the sector upgrade, Joseph boosted his ratings on several key semiconductor makers' shares to "buy" from "outperform."
At the top of the list was Intel (INTC: Research, Estimates), the leading PC microprocessor maker. He also upgraded Texas Instruments (TXN: Research, Estimates) a leading supplier of chips used in mobile phones, and Micron Technology (MU: Research, Estimates) which makes computer memory chips. Intel closed up $2.75 at $27.52. Texas Instruments gained $4.40 to $34 and Micron Technology climbed 3.45 to $41.60.
Other stocks Joseph said are likely to perform more strongly over the next several months included: Altera (ALTR: Research, Estimates), Applied Micro Circuits (AMCC: Research, Estimates), Infineon Technologies (IFX: Research, Estimates) and Xilinx (XLNX: Research, Estimates). Altera closed at $27.10, up $2.59, Applied Micro Circuits advanced $3.01 to $19.39, Infineon edged up 96 cents to close at $40 and Xilinx climbed $4.17 to end the day at $39.20.
Shares of Rambus (RMBS: Research, Estimates), which makes money by licensing a technology used to speed up computer memory systems, fell ahead of its latest quarterly results, which it is scheduled to reported after Wednesday's close, Rambus said Analysts are generally expecting the company to report a profit of 11 cents per share. Rambus slipped 60 cents to $18.24 Wednesday.
Separately, Salomon Smith Barney analyst Glen Yeung raised his rating on the chip-equipment sector -- which refers to companies that make the equipment used to manufacture semiconductors – to "outperform" from "neutral."
"While equipment sales should most certainly worsen over the next quarter and possibly two, we believe a fundamental bottom in the semiconductor market is becoming visible," Yeung said in a note to clients Wednesday.
"Equipment stocks will likely anticipate this," he said.
Yeung also raised his ratings on several of the leading chip-equipment makers, including Applied Materials (AMAT: Research, Estimates), the market leader, and KLA-Tencor (KLAC: Research, Estimates). Applied Materials jumped $3.28 to $46.03 while KLA-Tencor climbed $4.20 to $41.04.
The Philadelphia Stock Exchange's semiconductor index, or Soxx, rose 44.17 points to 564.29, an 8.5 percent rise on the day.
Just two days ago, semiconductor stocks fell sharply after another chip analyst, Dan Niles of Lehman Brothers, issued a report in which he said there are no signs of strengthening fundamentals and predicted that 2001 will be the worst year ever for semiconductor revenue.
Buying binge spreads beyond chips
Meanwhile, stocks in the broader technology sector moved mostly higher as well Wednesday.
The Nasdaq composite, which is weighted heavily with technology names, ended the session 50.38 points higher at 1,902.41, a 2.7 percent gain.
Shares of Motorola (MOT: Research, Estimates) the No. 2 mobile phone maker and a leading semiconductor supplier, rose even after its reported a wider-than-expected first-quarter loss and said it expects to report even weaker results in the current quarter. Motorola slipped 10 cents to $12.90.
Motorola's top competitors in the mobile phone market, Nokia (NOK: Research, Estimates), the market leader, and Ericsson (ERICY: Research, Estimates), which ranks third, rose as well. Nokia rose $1.12 to $26.62. Ericsson fell 10 cents to close at $6.10.
In the computer hardware segment, most of the leading PC vendors closed higher, including Compaq (CPQ: Research, Estimates), Dell Computer (DELL: Research, Estimates), Hewlett-Packard (HWP: Research, Estimates) and Gateway (GTW: Research, Estimates). Compaq climbed 31 cents to $17.66, Dell closed up 48 cents at $26.74, and Hewlett-Packard gained 42 cents to end the day at $30.25.
At the same time, shares of EMC (EMC: Research, Estimates), the top supplier of data-storage systems, rose even after the company said its latest results will fall short of expectations. EMC shares finally ended down $2.19 Wednesday to $32.21.
The Goldman Sachs computer hardware index gained 3.76 points to 301.06, a 1.3 percent rise on the day.
Among networking equipment makers, shares of Redback Networks (RBAK: Research, Estimates) soared ahead of its latest quarterly financial results. The company, which makes equipment that phone companies, Internet service providers, cable companies and other carrier use to build high-speed Internet connections for homes and businesses, reported a narrower than expected loss after the bell in its first quarter.
Earlier this month, Redback warned that it is anticipating a loss of 15 cents per share, where it previously had expected to see a profit of about 5 cents per share. Redback slipped 10 cents to $15.84 Wednesday.
Other networking stocks moved sharply higher as well, including Cisco Systems (CSCO: Research, Estimates), Juniper Networks (JNPR: Research, Estimates), Lucent Technologies (LU: Research, Estimates) and Nortel Networks (NT: Research, Estimates). Cisco stock advanced $1.54 at $17.40, Juniper gained $2.29 at $42.76, Lucent edged up 6 cents at $7.28 and Nortel gained 3 cents to $14.48.
The American Stock Exchange's networking index finished 10.33 points higher at 402.11, a 2.6 percent gain.
Dot.coms also moved mostly higher.
Shares of Internet media company Yahoo! (YHOO: Research, Estimates) advanced ahead of its latest quarterly results. After the bell Yahoo! said it beat expectations by a penny expected to be released after the close of trading. In March, Yahoo! warned that its results would fall short of previous expectations, telling investors that it expects to break even in the quarter. Prior to the warning, the Street had expected Yahoo! to log a profit of 5 cents per share. Yahoo! ended the day down 16 cents at $15.86.
Web advertising firm DoubleClick (DCLK: Research, Estimates) advanced as well. DoubleClick, one of the largest providers of targeted online advertising services, is expected to report its latest results after the close of trading Wednesday. The Street is expecting it to post a loss of 9 cents per share. DoubleClick advanced 18 cents at $12.62 Wednesday.
The Goldman Sachs Internet index finished 1.78 points higher at 116.93, a 1.6 percent gain on the day. 
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