Chip Stocks Still Suffering

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SAN FRANCISCO -- Semiconductor investors who were telling themselves midmonth that prices were going up got a hard dose of reality Thursday. The Philadelphia Semiconductor Index closed off 7%, on top of a 13% slide since Aug. 18.

Some chip stocks were slammed particularly hard in Thursday's overall market selloff: DRAM maker

Micron

(MU) - Get Report

dropped 10% to 26 5/16 and

Lattice Semiconductor

(LSCC) - Get Report

dropped 11% to 25 11/16. And there seemed to be no flight to quality in this round of selling.

Intel

(INTC) - Get Report

, for example, took a 4.5% hit, dropping 3 3/16.

Merrill Lynch

analyst Joe Osha said that the stocks are still reeling from harsh earnings preannouncements last week from

LSI Logic

(LSI) - Get Report

and

National Semiconductor

(NSM)

as well as weak earnings from

Analog Devices

(ADI) - Get Report

. On top of that

Applied Materials

(AMAT) - Get Report

announced this week further layoffs of its workforce.

The selloff has even left some value investors shaken. Denis Amato, chief investment officer of

Gelfand Maxus Asset Management

, said he has bought

Advanced Micro Devices

(AMD) - Get Report

over the past six months -- but he isn't buying more. He generally gives stocks a two-year time horizon to recover, but he's worried. "We are hoping the fundamentals validate our decision," he said with frustration in his voice. "You hope they don't come down after you buy, but they usually do."

Some fund managers, like

Marty Whitman

of

(TAVFX) - Get Report

Third Avenue Value, were buying semiconductor stocks today. But Osha said investors are just now realizing that clear signs of a recovery have to emerge before the chip makers and equipment providers come back. "We have to get out of the oversupply situation we have been in for the past two years," he said. "There has to be evidence that lead times are getting better and price increases across the board have to be sustained."