Analysts were gung-ho about the chip-equipment sector Monday after seeing signs of stabilization in orders in the December quarter. Goldman Sachs, Deutsche Banc Alex. Brown and Soundview each upgraded several companies in the group.

Goldman Sachs analyst James Covello added ATMI ( ATMI), KLA-Tencor ( KLAC) and Teradyne ( TER) to his recommended for purchase list. ATMI had been rated market performer while KLA and Teradyne had been rated market outperformer.

Novellus Systems ( NVLS) was raised to a market outperformer from market performer, while Applied Materials ( AMAT) remains on Covello's recommended list as his "single best idea." Overall, he upgraded the sector to market overweight from market weight.

Covello said accelerating order deliveries and reduced cancellations in the most recent quarter suggest business is stabilizing. "This is the first time during this downturn that we have seen this sign of stabilization," he wrote. The analyst also forecast a "sustainable move up in DRAM pricing" and noted that an industry consolidation is likely and would impact the stocks positively.

The analyst thinks the chip-equipment sector has limited upside, however, with the sharpest gains likely to take place in the next couple of months as the group's shares tend to rise with increases in orders. "If investors miss the early move in the stocks, there will be very little return left for the next 18 months," the note said.

In a separate note this morning, Deutsche Banc Alex. Brown upgraded Applied Materials, Teradyne and LTX ( LTXX) to strong buy from buy, saying the next two quarters are likely to surprise to the upside, as checks show increasing shipments and a significant uptick in component buys from certain customers.

The firm maintained its buy ratings on Novellus and Brooks Automation ( BRKS). Soundview, meanwhile, raised Applied Materials, KLA-Tencor, Lam Research ( LRCX), Novellus, and Rudolph Technologies ( RTEC) to strong buy from buy:

After falling sharply for two weeks, most of the chip-equipment stocks began heading higher on Jan. 23, following Novellus' fourth-quarter earnings report . The company missed revenue forecasts, and said margins wouldn't improve for at least the next two quarters. But it beat earnings per share expectations by a penny and CEO Rick Hill said some customers wanted to accelerate some shipments.

Shares of the group were rising again Monday following the upgrades. Applied Materials was lately up 4% to $43.81. ATMI was gaining 2.9% to $29.79. Terdayne was rising 30 cents to $30.30. Novellus was 1.7% higher to $41.85, and KLA-Tencor was 2.6% higher to $58.18.

Elsewhere in the chip-equipment group, LTX was up 6.2% to $20.31; Brooks Automation was 1.5% higher to $48.10; Lam Research was gaining 1.8% to $23.24, and Rudolph Technologies was up 5% to $36.30.

Just over a month ago, Deutsche Banc Alex. Brown counseled caution on the chip-equipment makers, due to what it saw as unrealistic expectations for a rebound in capital spending this year. At that time, he said he favored "back-end" chip-equipment firms like LTX and Teradyne.

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