Chip Stocks Leap Over Naysaying Analysts

Chip stocks opened 2003 with a flurry, even as some of the investing world's heavyweights were taking jabs at the sector.

Thursday opened with two Wall Street banks issuing jaded predictions for early 2003. Merrill Lynch says it's shorting a basket of chip stocks, while Goldman Sachs warned of a falloff in tech spending. The comments, which focused in part on the weak economy and in part on the perceived priciness of semiconductor company shares, illustrate pundits' increasing wariness about the timing of any economic pickup.

Yet PC and semi stocks vaulted higher, with the benchmark index rising 6%. Bulls cited incremental signs of economic stabilization, like firming business investment and today's surprisingly strong manufacturing report from the Institute for Supply Management. And so the first day of 2003 proved a continuation of last year, when even a string of painful setbacks did little to stifle a long-running debate about the sector's prospects.

"In general, I'm optimistic at least about a lot of tech companies," says Paul McEntire, manager of the (TPFQX - Cramer's Take - Stockpickr)Marketocracy Technology Plus fund. "The main point being that a lot of them have been beaten up quite thoroughly over the last couple of years, and from what I hear in different sectors, excluding telecom, things are improving."

Wall Street seemed to agree Thursday, despite the cautionary comments early on. Among the big players, Intel(INTC - Cramer's Take - Stockpickr) soared $1.08, or 7%, to $16.65; IBM(IBM - Cramer's Take - Stockpickr) added $2.70, or 3%, to $80.20; and Hewlett-Packard(HPQ - Cramer's Take - Stockpickr) gained 92 cents, or 5%, to $18.28.

Cruisin'

The runups came after Goldman Sachs warned that tech investors could be setting themselves up for a bruising if a rally kicks off early in the year. Analyst Laura Conigliaro argues that valuations and '03 estimates already look overblown.

She points out that the average tech company is trading at 1.8 times the P/E of the average S&P 500 company -- several notches above the pre-bubble high-end level of 1.4 times.