Chip Stocks Prospering Despite Recent Tech Selloff

PC chip stocks are surging as interest rate-wary investors shed the Net and buy into the seasonal infatuation for semiconductors.
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SAN FRANCISCO -- Downturn? What downturn?

That's what folks over at

Silicon Storage Technology

(SSTI) - Get Report

in Sunnyvale, Calif., may well be thinking these days. A maker of flash memory chips, the company saw its shares rise 48% last week to 16 3/16, even as tech issues in general and Net stocks in particular continued to slide.

Or look at competitor

Xicor

(XICO)

, which zoomed up 28% for the week to close at 6 13/32. And yet another flashmaker,

SanDisk

(SNDK)

, hasn't been doing too shabbily either. Its shares are up 40% for the past month, even after a 5% decline last week.

These are just some companies proving that when even Net stocks suffer, chip stocks don't necessarily feel the pain. Consider that since July 16, the

Nasdaq

has fallen 11%, while

Intel

(INTC) - Get Report

has risen 7% and DRAM maker

Micron

(MU) - Get Report

has gained 25%.

Not all chip stocks have been invulnerable to fears of interest-rate increases and other macroeconomic problems. "That's something that can really wreak havoc on stocks with high multiples," says Kurt Lanzavecchia, a chip analyst with

C.E. Unterberg Towbin

.

Lanzavecchia is talking about stocks like communications chipmaker

Applied Micro Circuits

(AMCC)

, which has had a spectacular run since last October but dropped 19% last week. And

Broadcom

(BRCM)

, which tends to rise and fall with Internet stocks, since its chips go into high-speed communication devices such as cable modems. Trading at 292 times trailing earnings, Broadcom's prices had been propped up by expectations of huge revenue growth over the long term. But when people fear interest-rate increases, Lanzavecchia says, they start preferring short-term stability over long-term risk.

So where do they look? This time of year they steer toward PC chips, since there is generally an increase in computer purchases by college students and Christmas shoppers in the fall. And that means Intel and most memory makers.

Dan Scovel, an analyst with

Fahnestock

, says that playing PC chip stocks in the summer is generally a safe bet, because the stocks will tend to rise on the expectation of a seasonal upturn, regardless of how much actual profits it generates.

"The stock market is based more on perception than on reality," he says. "Three years ago when Brian Halla moved over to head

National Semiconductor

(NSM)

, I wasn't sure he could turn that battleship around. But that didn't matter, because everyone

believed

he could, so the stock went up."

A host of companies will benefit from a rush of PC orders, says Gus Richard, a buy-side analyst at

Emerging Growth Management

, which owns both Xicor and flash memory maker

Atmel

(ATML)

, a stock that has been on a tear since mid-July. Atmel edged 1/16 lower to 34 5/16 Friday, but the stock gained 14% for the week. "If you are giving away PCs like cell phones, there are a lot of components going out the door," he says. That means analog chips, flash memory, DRAMs and discreet devices (those small single-function chips for things like hair dryers and garage door openers).

Many expect chip companies to report good revenue and earnings growth for the third quarter and even in the fourth quarter. "Inventories are lean," Richard says. "We are just in the beginning of the buildup." This isn't the time to sell, he says -- rather, it's the time to buy. Next week Richard expects the whole sector to be lifted when equipment leader

Applied Materials

(AMAT) - Get Report

reports its third-quarter earnings on Aug. 17.

The time to step out of chip stocks is before the end of the year, Richard says, since chip orders drop in the first quarter of the year. Then he expects to ride out a six-month downturn and buy back in before next summer's bottom. "There is potential that all of next year will be bad, but I don't think so," he says. "We've got a ways to go."

"The longer you stay in the room, the more money you make," Richard says. "But the room is on fire and we are all eyeing the door. By the end of the year you will want to get out of there."