Merrill Sees Fundamental Rebound in Semiconductors

It raises Linear, Semtech, Microchip, Maxim and National Semiconductor to buy.
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A handful of semiconductor makers were rising ahead of the open Thursday after Merrill Lynch talked up the sector in a research note.

"We think the underpinning now exists for a much more sustained, fundamentally based upward move in semiconductor stock prices," the brokerage wrote.

Merrill upgraded to buy from neutral

Linear Technology

(LLTC)

,

Maxim Integrated

(MXIM) - Get Report

,

Microchip Technology

(MCHP) - Get Report

,

National Semiconductor

(NSM)

and

Semtech

(SMTC) - Get Report

. It maintained buys on

Intel

(INTC) - Get Report

,

Samsung

and

Taiwan Semiconductor

(TSM) - Get Report

.

In its note, Merrill noted that the Philadelphia Semiconductor Index has risen sharply in the last six months, but is roughly flat over the past year.

"With the SOX back at 380, it's fair to wonder why we are shifting our stance on the sector now," Merrill wrote. "We frame our answer like any other investor, in terms of risk-adjusted return. We don't see much potential downside.

"Although valuations are high, earnings estimates seem reasonable or even conservative, unlike 2002. Without meaningful reductions to the earnings outlooks for companies, we think that the likelihood of a step backward in valuations is minimal."

On the Instinet premarket session, Intel was up 11 cents, or 0.4%, to $24.60, while Semtech was adding $1.01, or 6%, to $17.45. The semiconductors HOLDRs basket was up about 2%.