Chips' Flavor Isn't Lasting
Editor's note: This is a bonus story from Jon Markman, whose commentary usually appears only on RealMoney. We're offering it today to TheStreet.com readers. To read Markman's commentary every day, please click here for information about a free trial to RealMoney.
The big question humming through the tech investing world this month is whether semiconductor companies -- which are down about 25% this year but have rallied recently -- are finally cheap.
The answer from this corner of that world is that while a few chipmakers are close to troughs in valuation, as a whole the group is still richly priced. The main reason is that 2005 earnings estimates on most of the companies are probably too high, making them only seem inexpensive on a forward price/earnings basis.
Giving solace to bulls has been the oddly positive trading reaction to recent lousy earnings guidance from leading chipmakers National Semiconductor (NSM) and Broadcom (BRCM). The Philadelphia Semiconductor Index (SOX) is up 10% in the past week on a bout of short-covering and wishful thinking. When stocks go up on bad news, traders tend to think they're sold out.Tech investors have been burned by a couple of powerful up moves in the chip group this summer, though, and the fate of this move is likely to be similar, but with an evil twist: It should last longer but end the same. For some data on this, I'll look at a report published Monday by Merrill Lynch analyst Joseph Osha and offer my own calculations. Osha argues that investors today should focus on buying semiconductor companies at trough valuations because industry revenue is set to contract sharply in the next 18 months. He estimates sales will grow by just 6% in 2005, following a 31% advance in 2004. Profit margins for most of the major companies are near historic peaks already, he says, and unlikely to expand. And yet very few semis are at anything near trough valuations either on a historical or forward-looking basis. That's why a short-term trading rally of two to six weeks, sparked by optimism for the seasonally strong fourth quarter, will probably run into a wall of reality as companies announce better times are just not in the cards.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV