Communications Chip Stocks Face Sudden Downturn

News from hi/fn sparked a sector selloff. But rather than joining the exodus, fund managers with a stake in the stocks are seeing a buying opportunity.
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SAN FRANCISCO -- Fund managers with investments in communications chip stocks have been living easy for the past year.

Stocks like

PMC-Sierra

(PMCS)

,

Applied Micro Circuits

(AMCC)

and

RF Micro Devices

(RFMD)

have seemed untouchable. So what a shock to find them plunging Friday: PMCS closed down 10%, AMCC dropped 9% and RFMD was down 4%.

The stocks started tumbling after network chipmaker

hi/fn

(HIFN)

said Thursday that two major customers,

Lucent's

(LU)

Ascend

unit and

Quantum

, cut orders for the current quarter. The news ignited concern that communication companies may have built up their inventories in preparation for Y2K and that sales for chip companies may slow in the coming months.

"I think there are legitimate issues to be concerned about," says

Salomon Smith Barney

chip analyst Clark Westmont. For one, delivery times for chips have stretched out in the past few months. Generally when that happens, customers sock away inventory to ensure sufficient supply. Now, worries about possible Y2K problems may have caused customers to sock away even more supply. "We won't be able to quantify the problem in the next several months."

Fund managers who have bought communications chip stocks for their long-term growth prospects are staying put. Still, Friday's selloff was enough to dampen even the cheerful spirit of Bill Keithler, portfolio manager of

(FTPIX) - Get Report

Invesco Technology Fund, which holds several communications chip stocks, including Applied Micro, PMC-Sierra,

Vitesse

(VTSS)

and

Conexant

(CNXT) - Get Report

.

"If you own hi/fn, a little panic is justifiable," Keithler says. "But you really won't see any impact on Applied Micro, RF Micro,

Galileo Technology

(GALT) - Get Report

or PMC-Sierra."

Rather than selling, Keithler is looking for a chance to buy more. "If we get another panic run, we would consider adding to our positions," he says.

BancBoston Robertson Stephens

chip analyst Arun Veerappan, who triggered the hi/fn plunge with a report Thursday, says he thinks sellers of other chip shares are acting rashly. He expects to see great financial performances from most of the companies that sell networking and communications chips. "PMC-Sierra will have a great quarter and great outlook," says Veerappan, who has a strong buy rating on the stock. (BancBoston Robertson Stephens hasn't done any underwriting for PMC-Sierra.)

Westmont, too, says the possible problems from inventory buildup are short-term concerns only. As the markets for communications chip customers keep growing, the demand for the chips that go into every networking box and cellular phone also increases. "This is an incredibly attractive area," he says. "The fundamentals remain intact."

But a little caution is healthy given how high the stocks have risen in a short period of time. "We've been in a period of incredible greed," Westmont says. "Maybe it's fear's time for a while."