Chips Hit a Sticking Point

The run-up in semiconductor stocks stalled during the past week as a mixed bag of financial reports proved a drag on the sector's already steep gains.

"Investors wanted everything rosy-plus," says Kim Arthur, managing director at Main Management in San Francisco. "They got rosy, but not the plus."

Reports throughout the chip sector showed strong results for the seasonally weak second quarter but relatively cautious expectations for the third quarter. Although caution is not a new word in the chip executive's lexicon, investors had been building stocks up during the previous two months on the hope that fundamentals would improve sharply and to the right.

The Philadelphia Semiconductor Index is up 23% since May and 12% since the start of July. For the year, the index is up 9%. The Nasdaq Composite (Nasdaq) is up 14% since April and 6.5% in July, making it barely positive for the year.

In its earnings report on July 19, Intel beat Wall Street's earnings target for the second quarter but didn't have the confidence to move its full-year gross margin target higher.

Likewise, PC shipments rose sharply in the second quarter, but industry researchers were hesitant about the pace continuing through the year's final six months.

Demand should accelerate for many electronics-related companies in the months leading into the back-to-school and holiday shopping seasons, but the dog days of summer could stretch through August. With a lack of news and data points, investors could be stuck in their current positions without a concrete reason to pick up additional holdings.

Arthur says that indicators for medium-term chip demand are positive, including increasing factory utilization, strong demand for cell phones and MP3 players, and stable memory prices. But he also didn't see much on the horizon that would truly spur investors.

"For near-term catalysts, there's nothing over the next few months, which is why there could be a little time-out here," he says.