The End Is Near? Salomon's Joseph Sees Third-Quarter Bottom for Chips

(Updated from 11:16 a.m. EDT)

Call it "Zen and the Art of Semiconductor Bottom Calling."

In a research note this morning, semiconductor guru Jonathan Joseph wrote: "The industry will seek balance, and we believe this is the first quarter of that transition." In an elaborate metaphor describing mountain climbers in the Death Zone above 24,000 feet, the Salomon Smith Barney chip analyst called for a bottom in the sector during the third quarter, with an uptick in the fourth quarter as year-over-year order comparisons improve.

"Given that 80% of our companies preannounced weaker than forecast earnings, investor focus will likely be on guidance for Q3 and beyond," Joseph wrote. "We expect Q3 to be down slightly from Q2, but for the outlook to be cautiously optimistic about the rest of the year."

Today's call wasn't the first time Joseph got excited about the sector. Back in early April, he upgraded the entire semiconductor sector to market outperform and tacked buy ratings onto eight of the biggest names in the group, citing improving macro-economic conditions. While most other analysts argued his call then, the Philadelphia Stock Exchange Semiconductor Index, known as the SOX, has risen 12% since the start of April, topping the 4.6% rise in the S&P 500 during that period. Of course, Joseph was also the analyst that warned investors out of the sector back in late November of last year, before the sector tumbled.

In today's note, the analyst said he believes the personal-computer component segment will lead the sector out out of the doldrums, followed by broad-line, wireless and finally wireline chip companies. "We favor Intel(INTC Quote), Texas Instruments(TXN Quote), Analog Devices(ADI Quote), Altera(ALTR Quote), Agere Systems and Applied Microcircuits(AMCC Quote)," he wrote.

Joseph said the industry is "in an extremely hostile, but also very transitory condition. The pain of the current climate can not last forever, just as the euphoria of a year ago could not last." Joseph called for a 5% sequential increase in PC unit shipments in the third quarter, and a 10% to 15% sequential rise in the fourth quarter.

The analyst also said signs in the computer-motherboard industry and DRAM pricing lead him to believe that a bottom is near.