NEW YORK (CNN/Money) - To say that chip stocks have had an incredibly rough year would be a massive understatement.

The Philadelphia Semiconductor Index (made up of 18 of the most prominent semiconductor and chip-equipment companies) has plunged 26 percent year-to-date.

So, investors who like to get in on the cheap could be forgiven for starting to take a look at semis -- P/Es for many of the group's leaders are less than 20, based on forecasts for 2005.

But caution is advised. That's because earnings estimates for next year have been reduced sharply in recent months. On average, analysts have cut their 2005 earnings estimates for the 18 stocks in the Sox by nearly 19 percent during the past three months.

"When you have negative earnings revisions, chip stocks typically do not work no matter how cheap they look. At some point, the stocks may get so cheap that you can afford to look past the revisions but I'm not sure we're there yet," said Alex Vallecillo, senior portfolio manager with National City Investment Management Co.

What's more, the estimate cuts are probably not done, according to Ambrish Srivastava, an analyst with Harris Nesbitt.

"We continue to stay pretty negative on the group. Estimates have to come down a lot more so it's tough to look at next year's numbers and say the stocks are looking cheap," Srivastava said.

Vallecillo said that some stocks are nearing a point where he thinks they have little downside left, citing Intel, National Semiconductor, Texas Instruments and chip-equipment firm Novellus Systems.

It hasn't been a pretty year for tech stocks. But chips have really taken it on the chin in 2004.

Apjit Walia, an analyst with RBC Capital Markets, agrees that it's not time for investors to be picking chip stocks indiscriminately.

He said that three particular subsectors of tech appear to be benefiting from strong demand: graphics, wireless and consumer electronics.

With that in mind, he said that ATI Technologies, Texas Instruments and Power Integrations, should have a better chance of putting up solid results.

TI, for example, is expected to post fairly solid quarterly results on Monday, thanks to a healthy environment for cell phone sales. (TI's biggest customer, Nokia, raised its fourth quarter sales target last week.)

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"Consumer oriented chip companies are seeing more strength now. The rest of tech is still pretty weak," Walia said.

Vallecillo also said that chip companies with a niche focus in growing areas of consumer electronics are probably better bets than chip companies whose fortunes are tied more closely to personal computers and servers.

For this reason, Vallecillo said he's intrigued by graphics chip maker ATI, which is benefiting from a booming market for video games. And the only chip stock that he owns in the funds he manages is Sandisk, which makes flash memory chips for storage cards used in devices like digital cameras and MP3 players.

But overall, chip companies still face many challenges. Srivastava said that inventory concerns will continue to plague the sector.

Although Intel did report a slight sequential decline in inventories in the third quarter, Srivastava fears that the buildup of inventories by Intel and many other chip firms earlier this year was so dramatic that it will take several months to completely work through.

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"There's still a lot of excess inventory. Our sense is that this could result in below seasonal sales in the fourth quarter, which could pressure margins over the next few quarters," said Srivastava.

So investors will have to resist the urge to buy chip stocks that appear to be cheap if the only good thing you can say about the stocks is that they seem cheap. Fundamentals have to improve first before the stocks can once again be considered attractive.

"There's no question that the more chip stocks go down, the more they should look appealing," said Vallecillo. "But with that said, I don't think you can go in here and buy things left and right and be bailed out by the cycle anytime in the near-term."

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no banking ties to the companies.