For Chips, Nibbles Not Bites

Is the bloodletting that has pervaded the semiconductor sector finally coming to an end?

Chip stocks got a modest but long-awaited lift Wednesday after Goldman Sachs upgraded several semiconductor companies, including Intel(INTC Quote).

Although Goldman's note suggested that the chip sector's two-month slide may be near the bottom, many investors continue to view the sector with apprehension -- particularly in light of the broader market's tumultuous state.

"I think the trading environment isn't lending itself very well to any tech shares right now," says Michael Church, an analyst at Church Capital Management. "So, to me it seems prudent to play wait-and-see instead of trying to catch the falling knife. Let them prove themselves."

Chip stocks have been hammered by a combination of industry-specific issues and general macroeconomic trends, including rising prices for energy and commodities, as well as the potential for interest rate hikes.

Investors are also worried about the specter of increasing levels of chip inventories throughout the distribution channel and slowing demand for personal computers in the U.S. and Western Europe.

Then, of course, there's the stock-option backdating controversy, which appears to have had a disproportionate impact on chip companies when compared with other industries.

Because many of these concerns continue to linger, few investors are ready to declare that chip stocks are out of the woods.

"If PC [sales] aren't going, basically everything is going to slow down," says Pat Adams, chief investment officer of Choice Investment Management. "People are hanging their hats on cell phones carrying us, and I just don't think that's possible."

And with the Fed looking likely to continue raising interest rates to contain inflation, says Adams, the chip sector, along with the overall economy, could see a lot more downside in the coming months.

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