Semiconductor Stocks Rally Despite Warnings From Sector

One semiconductor maker after another is warning about financial results, which would seem to indicate that investors need to run from the sector.

But the stocks of several of the companies warning were rising Monday, and the Philadelphia Semiconductor Index was climbing 5% despite all the bad news.

The result is a perplexing atmosphere, but one that appears to signal that investors are feverishly searching for the bottom. Chip stocks often move quickly once the sector does rebound, so investors may fear missing the bottom. Still, the general direction for semi stocks since mid- to late January has been down as the bad news has accumulated.

Three chip companies, Cypress Semiconductor (CY), LSI Logic (LSI) and Vitesse Semiconductor (VTSS), added to the turmoil Monday by issuing warnings. The messy Monday morning follows similar recent statements from the likes of Texas Instruments (TXN). And most of the warnings cite similar issues, namely weakening demand, which is leading to fatter inventories.

In the midst of all this confusion, Hans Mosesmann, an analyst at Prudential Securities, is trying to provide something of a roadmap.

In a report Monday, Mosesmann sorted through his universe of chip stocks and ended up downgrading 15 of them in an effort to "place increased emphasis on our strong buys and to be clear and consistent with our view of the semiconductor environment and cycle over the past several months."

Cited as strong buys were AXT (AXTI), Emcore (EMKR), Micron Technology (MU), Texas Instruments and Xilinx (XLNX).

Downgraded to holds were Atmel (ATML), Cree (CREE), inSilicon (INSN), Lattice Semiconductor (LSCC), Microchip (MCHP), Pericom (PSEM), Sage (SAGI), STMicroelectronics (STM), Alliance Semiconductor (ALSC), Altera (ALTR), Arm Holdings (ARMHY), ATI Technologies (ATYT), LSI Logic, Nvidia (NVDA), and Omnivision (OVTI). (Prudential has done recent underwriting for AXT, Cree, Emcore, Atmel, Microchip, Pericom, inSilicon, Lattice Semiconductor, Nvidia, Omnivision and Sage.)

Mosesmann's note came out about the same time that LSI Logic issued it's warning, which cited the "adverse economic climate and a widespread inventory correction in the communications and storage markets" as reasons for its shortfall.

But despite the downgrade and the warning, LSI was among the chip stocks rising Monday, mirroring what happened last week to Applied Micro Circuits (AMCC).

So even with a roadmap, it appears that chip investors are venturing off the marked path.

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