Chip stocks are up, but true gains remain elusive.

Semiconductor stocks eked out gains Thursday, in line with the broader market, but most chip stocks remain in a sideways pattern ahead of earnings season, which begins in earnest next week.

Expect the pattern to continue even as analysts stay busy assessing and predicting how first-quarter financial reports will affect stocks in the subsequent weeks after earnings.

Analyst Joe Osha at Merrill Lynch, for one, upgraded a host of semiconductor stocks on Wednesday because their valuations seemed low. He didn't see much in the way of improving fundamentals through the rest of the year, and he stated that stocks would likely remain sedated during this time period.

This

isn't anything new for investors to digest. Industrywide sales growth predictions for 2005 range from flat to up 5%, with most of that growth happening in the second half of the year. Predictions for 2006 also reflect anemic expectations.

It's not until 2007 that growth is expected to eclipse 10% -- and that's based on very preliminary targets. More accurate predictions for 2007 won't materialize until later this year.

Because semiconductor stocks trade on expectations 12 months in advance, look for the

status quo to continue. Next week's financial reports will be issued by

Advanced Micro Devices

(AMD) - Get Report

and

Lam Research

(LRCX) - Get Report

, with

Intel

(INTC) - Get Report

,

Novellus Systems

(NVLS)

,

Teradyne

(TER) - Get Report

and

Broadcom

(BRCM)

on tap for the week after that.

The Philadelphia semiconductor index is level with where it began the year and has traded flat for the past two weeks. That doesn't mean there won't be buy-and-sell points. The index dropped 11% to start the year and then rose 17% to a three-month high.

When an industry as a whole appears stagnant, the ability to single out stocks that can outperform within the group is key to making something out of nothing. "If you can find the right specialty chip company, then you can probably have a smoother ride than with the more general chip companies," says Sam Olesky, principal of Olesky Capital Management in Mill Valley, Calif.

Though Olesky owns shares of

Texas Instruments

(TXN) - Get Report

and

Qualcomm

(QCOM) - Get Report

-- two longtime holdings -- he cites a recent go-around with

Applied Materials

(AMAT) - Get Report

as evidence of the difficulty of investing in this space.

The analyst held this company during the run higher in 2003 -- a period when the stock more than doubled in under a year to $25 -- but then sold the stock sooner than he had expected. Applied Materials, the world's largest chip-equipment company, fell to around $16 during the first half of 2004 and has traded range-bound since.

"I just thought it would turn out much better than it did. Why even try and do this?" he says.

That's a sentiment Olesky is not alone in sharing. Just when the Internet bubble appeared a thing of the past and sector stocks started to log substantial gains, an inventory buildup washed through the industry, taking down valuations for everyone during much of last year.

Still, investors will have a tough time when trying to pinpoint single-stock winners in the semiconductor industry. Shares of

Cypress Semiconductor

(CY) - Get Report

, for example, have made a round-trip back down to where they began the year, as investors have bailed on the stock after a strong run higher and ahead of the company's first-quarter financial report.

The bull and bear scenarios for the semiconductor maker played out this week, with two investment-bank researchers offering up starkly different viewpoints of where the company is headed.

Shares fell 5% Tuesday and ticked lower again Wednesday to $11.72. Tuesday's decline began with analyst John Barton of Wachovia Capital Markets downgrading Cypress to market perform and lowering his financial estimates.

"Further appreciation of the shares in the near term is unlikely since we believe that estimates need to be revised lower and such cuts will offset the excitement about the company's solar-cell business, which, in our opinion, has been a primary driver of the shares to current levels and appears to be growing as expected," says Barton in his research note.

Cypress shares are now down 21% since the start of March when the stock peaked at an eight-month high of $14.89. From mid-January to March 1, Cypress shares rose 50%, thanks mostly to

increased attention on Cypress' SunPower subsidiary, a nascent business that's expected to log strong growth and earnings in the coming two years. The first quarter will mark the first time that SunPower's financial results get presented separately from those of Cypress.

Barton says that SunPower's potential is built into the company's stock and that investors will balk at carrying shares higher once they focus on Cypress' core business. He values Cypress shares between $12 and $14.

Later Tuesday, a more optimistic view was provided by Lehman Brothers analyst Ted Parmigiani in a note to clients. He reiterated an overweight rating and a $19 price target and said that there is "a lot of reward for investors willing to gain a better understanding of the upside potential that Cypress is capable of achieving from both its core plus SunPower segments."

Further, he sees positive indicators coming from the company during its first-quarter report. Parmigiani says pricing, capacity utilization and orders in March increased through the quarter's close, "suggesting possible first-quarter earnings upside followed by probable and more material second-quarter and beyond earnings upside." Lehman has received noninvestment banking revenue from Cypress in the past year.

The consensus on Wall Street is for Cypress to report a loss of 12 cents a share on sales of $210 million, according to Thomson First Call. Barton is beneath that midpoint for both loss and sales; Parmigiani is even with the loss, but with a positive bias, and above the sales target.

Cypress reports its financial results on April 21.