This week, in our focus on the winning analysts in each industry category from our

Analyst Rankings -- Equity 2000

, we profile the top analysts tracking semiconductor equipment companies. Next week we'll look at the chipmakers themselves. (Our last focus was on

electric utilities.)

The semiconductor sector is currently in a cyclical downturn, and the equipment stocks have suffered along with the rest of the group. Hit with an inventory glut and slowing capital spending, chip equipment stocks have had their estimates slashed by our top-ranked analysts in recent months.

Despite the group's poor fundamentals, however, these stocks spiked in early January, when the

Federal Reserve surprised the Street with a half-percent cut in interest rates. The uptick showed that investors were already discounting the economy's weakness and were "looking forward to the time when the industry will resume a healthy growth pattern," says

Credit Suisse First Boston's

John Pitzer, who assumed coverage of the group from third-place winner Elliott Rogers last spring.

With fundamentals still deteriorating, though (our analysts expect to cut their earnings estimates even further as inventory depletions in the fourth and first quarters take their tolls on business), this upturn was more of a false start than a solid rally. All of our top three analysts caution investors about the near term, noting that the real race won't likely start until sometime in the second half of 2001. At that point, the effects of the Fed's interest rate cuts (the central bank shaved another 50 basis points off of rates Jan. 31 and is widely expected to cut further at its March meeting) will likely begin to be felt in the form of increased capital and consumer spending.

In agreement about the cycle, our analysts differ in the criteria they use to pick the individual stocks that will likely fare best -- or at least fare least badly -- in the currently unfavorable macroeconomic environment.

No. 1-ranked analyst Gunnar Miller of

Goldman Sachs

is focused on minimizing the downside risk. For this reason, he recommends the names with the lowest

price-to-earnings ratios. He's telling investors who have a nine- to 12-month investment horizon to begin dipping their toes now into

Advanced Energy Industries

(AEIS) - Get Report

,

Axcelis Technologies

(ACLS) - Get Report

,

Credence Systems

(CMOS)

and

Lam Research

(LRCX) - Get Report

(his top pick). Goldman has had investment banking relationships with Advanced Energy and Axcelis.

At the same time, Miller notes that the industry leaders on Goldman's recommended buy list are

ASM Lithography

(ASML) - Get Report

,

Applied Materials

(AMAT) - Get Report

and

Teradyne

(TER) - Get Report

.

Second-place analyst Jay Deahna of

Morgan Stanley Dean Witter

selects his stocks based on his observation that the sector has begun to shake out into companies with pricing power and those without it. "The premise of my picks," explains the analyst, "is that their equipment solves the toughest challenges in the move to advanced technologies and larger wafers. As a result, these companies have significantly better pricing power than the average industry price progression."

The names he favors: ASM Lithography,

Cymer

(CYMI)

,

DuPont Photomasks

(DPMI)

,

KLA-Tencor

(KLAC) - Get Report

,

Nanometrics

(NANO) - Get Report

and

Rudolph Technologies

(RTEC) - Get Report

. (DuPont is his top pick.) Morgan Stanley has investment banking relationships with ASM, Cymer and DuPont.

Elliott Rogers, voted No. 3 in our poll last spring, has since been named CSFB's head of global technology research. Though he has passed his research mantle to Pitzer, Rogers still follows the industry -- but with a wider-angle lens, so to speak. Rogers and Pitzer counsel playing the current environment by avoiding the stocks altogether for now, since the two analysts believe the situation will only get worse before it gets better. In their view, this summer will offer a better buying opportunity than exists now.

When the turnaround comes, they believe the companies with the largest

market caps will also be the biggest outperformers. The names they prefer are Applied Materials, KLA-Tencor, Lam Research,

Novellus

(NVLS)

and Teradyne. KLA-Tencor is their No. 1 pick.

Semiconductor Equipment

Rate Their Stock Picks:

Which stock do you like best?

Miller: Lam Research

Deahna: DuPont Photomasks

Rogers/Pitzer: KLA-Tencor

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