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 companies. Next week we'll look at health care distributors and services. (Our last focus was on
The four semiconductor-sector trackers profiled here are properly cautious on this industry, realizing full well that its return to health will depend on an economywide renewal fueled by lower interest rates. But, at the same time, each analyst has a unique perspective on the timing of the eventual rebound in the stocks, as well as on which stocks are likely to perform best when the business cycle turns up.
First-place analyst Mark Edelstone of
Morgan Stanley Dean Witter
is betting that the semiconductor group's stocks will reach their low point sometime in the third quarter. That is when, he believes, the
Federal Reserve's interest rate cuts will kick in throughout the economy, bringing a turnaround in the semiconductor group's inventory correction and its deteriorating business fundamentals.
Edelstone doesn't advise being totally out of the industry's stocks until then, though. Rather, he thinks there will be outperformance throughout the year in a segment consisting of companies that do not manufacture their own wafers. By outsourcing wafer fabrication, these firms are able to have variable-cost instead of fixed-cost business models. The four so-called fabless firms he prefers are
, all of which have strong product cycles and good pricing power, in Edelstone's estimation. (Morgan Stanley has had an investment banking relationship with each of these companies.)
No. 2 analyst Dan Niles of
is the most negative of the foursome. He tells investors to avoid the group entirely until late July-early August, at which point they should be prepared, as he puts it colloquially, to "back up the truck." The companies that he expects to do well are those that flew high in previous up cycles.
He names communications-centric companies
Applied Micro Circuits
RF Micro Devices
and Xilinx, all of which feed off of the high growth in broadband connectivity. He also likes low-cost manufacturer
. (Lehman has done investment banking for Vitesse.)
Charlie Glavin, the Credit Suisse First Boston analyst who is tied for third place with
Drew Peck, suggests the second quarter of 2001 will be "the equilibrium quarter, when demand and production come back into line, as production is adjusted to meet more-realistic revised numbers."
Glavin plans to lift his underweight stance on the stocks right after the first-quarter reporting period is over to take advantage of that impending equilibrium. But until then, if you want or need to play this sector, Glavin recommends putting money into three communications-related names for their long-term performance potential. He is a fan of Applied Micro Circuits,
. (Credit Suisse First Boston has provided investment banking services to Applied Micro Circuits.)
Peck, for his part, contends that the cloud hanging over these stocks is partly psychological: Investors who are worried about the personal computer business automatically dismiss his sector simply because 40% of semiconductor components are sold for use in PCs. The flip side of that is that 60% of chips go to other uses. Thus, Peck chooses companies that don't supply chips to the PC market but are instead geared to next-generation consumer electronics and communications systems. He particularly likes large-caps
He also recommends putting assets into the relatively undervalued small-caps Applied Micro Circuits,
. He predicts that these stocks "could outperform the industry average by 40% to 50% in the coming year." (SG Cowen is a current or recent banker for all five of these smaller-cap stocks.)
Rate Their Stock Picks:
Which stock do you like best?
Niles: RF Micro Devices
Glavin: Applied Micro Circuits
Peck: Analog Devices