NEW YORK (CNN/Money) -
Is the recent dip in chips just a minor blip or the beginning of a much bigger slip?
Semiconductor stocks have been among the best performing stocks this year as investors placed bets on a strong economic recovery in the second half of 2003. But in the past month, four major chip companies have issued sales warnings. (The offenders are National Semiconductor (NSM: Research, Estimates), Motorola (MOT: Research, Estimates), Texas Instruments and Advanced Micro Devices.)
And although the Philadelphia Semiconductor index, more commonly known as the SOX, is still up 23 percent year to date, it has fallen 10 percent since June 5. The Nasdaq has pulled back only 2.5 percent.
Alex Vallecillo, senior portfolio manager with National City Investment Co., which subadvises the Armada family of mutual funds, said that investors were profit-taking ahead of the end of the second quarter.
"If investors felt that the fundamentals were strong enough, more people would stay in the stocks," said Vallecillo, who adds that National City has been trimming its stakes in chip companies to lock in some gains.
Weak semiconductor sales are a concern, indicating potential weakness in the broad tech sector since chips are such an integral part of most high-tech devices.
Watch for cuts
Adam Parker, a chip analyst with Bernstein, said that second-half estimates for most chip companies are probably too optimistic. He said there has not been enough of an increase in demand for products that are big users of semiconductors, such as personal computers and cell phones, to justify a big surge in sales and profits for chip companies.
Making matters worse, Parker adds, the stocks are expensive. Texas Instruments (TXN: Research, Estimates), for example, trades at 51 times 2003 earnings estimates while AMD (AMD: Research, Estimates), which is expected to lose money this year, trades at nearly 50 times 2004 earnings estimates. Parker doesn't own any of the stocks that he follows and Bernstein does not have an investment banking business.
Even those who have a more bullish view about chips said that the stocks were due to cool off. Sunil Reddy, manager of the Fifth Third Technology fund, said that he thinks a rate cut by the Federal Reserve could help spur information technology spending, which would benefit chips, but admits that the rally "looks a bit extended."
Barry Randall, manager of the First American Technology fund, said that summer is typically slow for chip stocks, but could be especially so this season because of the spring rally. Randall said he recently trimmed stakes in Intel (INTC: Research, Estimates) and Texas Instruments and sold off his positions in LSI Logic (LSI: Research, Estimates) and RF Micro Devices (RFMD: Research, Estimates).
In addition, while the industry is arguably in better shape than it was at this time last year, doubts still linger about just how robust a recovery will be. "The issue right now is whether or not now is a time of certainty in the chip business and the answer is no," said Randall.
Bucking the trend
It's a big industry, and there are pockets of strength. Intel, for one, has kept up its momentum. The world's largest semiconductor company issued a fairly rosy second-quarter outlook earlier this month, and there's a strong case to be made that AMD's woes are more due to tough competition from Intel and not a deteriorating outlook for chips. Shares of Intel rose slightly on Tuesday, despite AMD's warning.
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Another bright star in the semiconductor world is ATI Technologies (ATYT: Research, Estimates), which makes graphics chips used in computers, digital televisions and handheld devices. ATI's stock surged 15 percent Wednesday after the company reported better-than-expected third-quarter results.
Simply put, investors just need to be more cautious. "There is good news out there for some chip companies," said Vallecillo. "But this is no longer a rising tide lifting all boats kind of environment."
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