Chip-Equipment Cycle Confounds

SAN FRANCISCO -- With uncertainty comes underperformance.

And both terms apply this year to semiconductor-equipment stocks, which have lost ground to other tech stocks in 2005, because of the mystery of where the industry sits in its current business cycle, according to six analysts who gathered here Thursday for a panel discussion.

While some clarity is expected shortly as earnings season gets under way, even that might not be good enough to clear up the confusion about where stocks go from here. Half the panel's analysts predicted that a peak in stocks will occur at the start of 2006, while the other half predicted a trough will occur at the same point.

These bifurcated opinions come on the back of a rally that began two weeks ago and lifted many chip-equipment stocks, such as Applied Materials(AMAT - Cramer's Take - Stockpickr), Novellus Systems(NVLS - Cramer's Take - Stockpickr) and KLA-Tencor(KLAC - Cramer's Take - Stockpickr), back to break-even for the year.

Not that the varied opinions were a total shock -- after all, the title of the discussion was "Bulls and Bears" -- but they do illustrate the difficulty in making money in this volatile sector.

The panel discussion, held as part of Semicon West, the chip-equipment industry's largest trade show, was actually more of a debate featuring alternating viewpoints about the industry's growth rate (both past and present, oddly enough), the importance of cash flow as an indicator of stock appreciation, as well as the importance of consolidation as a creator of investor wealth.

The bulls' belief is that chip-equipment order rates will turn higher in the third or fourth quarter (a delay from projections earlier this year of a second-quarter turn) and this will spark stocks. The run-up would last through the beginning of next year, and then cease once actual orders materialized (since investors anticipate turns in fundamentals).