Drip by drip, 2004 draws closer to the inevitable end. The leaky-faucet market of the final week finished Thursday with mostly modest gains as health care, brokers and semiconductors helped overcome a wicked plunge in steel stocks. The semi sector has been a great dustbin bargain since hitting bottom back in September -- a play that will continue to pay for selective shoppers into 2005.
On Thursday, the
Dow Jones Industrial Average
slipped 29 points, or 0.3%, to 10,800.30 on a dull penultimate day of trading. The
gained 0.1 points to 1213.55 and the
added 1.34 to 2178.34. China again played the bad guy, as news that the world's most populous country had become a net exporter of steel last month spooked the sector.
lost 5.5% and
added 0.3% and
The Philadelphia Stocks Exchange's Semiconductor Index ended Thursday with 0.2% gain to 431.26. It's been a terrible year for the SOX, down 15% since it ended last year at 508.12. The chipmakers and their equipment vendors placed dead-last out of 120 industries tracked by Morningstar, with year-to-date losses of 19% and 23%, respectively. (Makers of agricultural chemicals, like
, look likely to top Morningstar's sub-sector charts for the year with a 73% gain through Wednesday, in case you were wondering.)
For makers of silicon chips, it hasn't been a total loss -- at least since September. Bargain-hunting amid the chip wreckage
has been a highly profitable occupation since the SOX hit bottom on Sept. 8 at 351. The index got back to almost 450 this month before tailing off as
, among others, lowered their guidance for the current quarter.
The recovery rally came after the SOX had taken a pasting, down from over 550 back in January. And it also came even as dozens of chipmakers were confessing poor third quarters. Weaker demand in Asia and customers suddenly caught with excessive chip inventories were to blame for the late-summer swoon. Stocks had already fallen so far, however, that confirmation of the bad news allowed a base to form and investors began looking further out to happier days ahead.
Now that the index has regained at least the summer's steep losses as the chipmakers are closing out the fourth quarter, the question is whether the rally will take the sector any higher. The fundamentals look better now with only a handful of companies issuing negative guidance this time around.
Bernstein Research analyst Adam Parker, whose on-target September recommendations included
, says there's still room for more gains. Analog is up 18% from its low, National Semi is up 50%, Microchip rose just 5% and Intel has gained 19%.
"Evidence of seasonal demand or inventory reduction will likely buoy optimism about the group," Parker wrote in his most recent report on the sector. "Given the relative paucity of current growth opportunities in the market, we envision semiconductors as providing the allure of upside that will merit some continued exposure."
Among Parker's continuing picks going forward are National Semi, Intel and Microchip. He also likes
, a maker of power-integration chips used in everything from cell-phone batteries to automobiles to space satellites. The stock got a boost Wednesday after being named one of CSFB's best semiconductor picks for 2005. It closed at $38.65 on Thursday, leaving investors up 14% from its $34.01 low back in September.
Linear was among those disappointing back in October when it said fourth-quarter revenue would be no better than third-quarter revenue.
Paul McWilliams, who worked in the industry and now runs Next Inning Technology Research, agrees guidance has been "dismal at best." According to McWilliams, if Linear's forecast is correct, it would be the first time the company suffered a decline in fourth-quarter sales from the previous quarter since it went public in 1986.
As far as the duration of the current recovery in the stocks, the critical issue -- the $64,000 question, McWilliams says -- will be what companies say about the first quarter of 2005 when they report fourth-quarter results in coming weeks. As the not-so-gloomy holiday shopping season winds down with plenty of empty space on the shelves where microprocessor chip-enabled gadgets used to be, there's plenty of room for restocking.
Intel and Linear, both held in McWilliams' portfolio, will be among the first to guide and while they may speak conservatively, there will be enough juicy tidbits to keep the rally running. "Bottom line, we continue to see situations that should support an early January rally in semis," he says.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send