(Updated from 10:23 a.m.)

At some point, things get so bad that they cannot get any worse. Using this argument, influential

Salomon Smith Barney

analyst Jon Joseph upgraded the semiconductor industry to market outperform from neutral.

Joseph told investors the bottom in semiconductor stocks is just a few months away. Despite the bleak words used to describe the state of chipmaking, the analyst says the worst is in the rearview.

He upgraded eight of the largest semiconductor names, from

Altera

(ALTR) - Get Altair Engineering Inc. Class A Report

to

Xilinx

(XLNX) - Get Xilinx, Inc. (XLNX) Report

. Joseph said he believes the cyclical sector -- which rises and falls with the economy -- cannot get any worse because he thinks shipments hit bottom in February and orders hit bottom in July. The

Philadelphia Stock Exchange Semiconductor Index

, or SOX as the chip tracker is known, has performed dismally since March 23, falling 19%. Where others see devastation, Joseph sees opportunity.

The index closed at 520 yesterday. "We believe the SOX has downside risk to 400, with upside potential to 700," he wrote.

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Back in July 2000, Joseph turned on the industry, downgrading four chip names and warning that rising inventory levels could impact the bottom line. He did it again in October, warning that

Intel

(INTC) - Get Intel Corporation (INTC) Report

would feel the pinch due to the declining PC market. At the time, he was the first high-profile analyst to hint the slowdown would be getting a lot worse. In the weeks to come, the comment would prove prescient, with a host of PC makers warning and forcing chipmakers to do the same.

* data in euros.

A closer look at Joseph's reasoning behind the upgrades is less convincing, however. He does not see fundamentals improving. He does not say orders will get better. He does not say spending will pick up significantly. He simply says the sector cannot get any worse, so stocks will recover. "Conditions at many of our companies are the worst that even old-timers, who have been through scores of downturns, have even seen. If it cannot get worse, it will get better. If it gets better, the stocks will begin to reflect that."

According to the analyst, the personal computing market should rebound a little bit in the second half of the year. That isn't saying much considering that personal computer growth will be the lowest since 1985. Positive data from Taiwan about motherboards points to a possible recovery, but the first three weeks of March show that consumer demand is almost nonexistent. Joseph also believes PC inventory problems are clearing up.

In a note this morning,

Goldman Sachs'

Terry Ragsdale took a "wait-and-see" approach to the semiconductor industry, also acknowledging the bottom could be at hand. But Ragsdale sees no reason to buy right now. Not until next week, when investors have reacted to a wide slate of earnings releases, which are expected to be horrible.

"Next week is the heart of semiconductor earnings season. The fundamental news will be lousy, with only the magnitude of lousiness in question, and we expect another significant round of downward estimate revisions as a result," he wrote. "What's less clear is how the stocks will react. If the second quarter turns out to be another double-digit sequential revenue decline, investors may conclude that two such quarters mean that the worst is behind us."

Optimistically Pessimistic? Or Pessimistically Optimistic?

Just two days ago, Joseph said Intel could dip below $20, but it hasn't yet, closing at $24.77 yesterday. It's worth noting that Joseph, who was right nine months ago when he turned negative on Intel and other chip companies, hasn't changed his tune. He still thinks Intel faces a downside risk to $20, only this time, he thinks the stock has upside to $40.

Joseph's comments, based primarily on stock valuations, slide down the slippery slope of relativism. One on hand, the environment is terrible and stocks could still go a little lower. On the other hand, stock prices are so low that there's really no place else to go but up. That's his view on Intel, anyway.

"Coming out of its worst quarter in 15 years, we believe Intel will benefit from a seasonal and secular acceleration in the second-half of 2001, extending into 2002," Joseph wrote. "This despite news of slowing in some overseas markets."

Joseph made similar comments about nearly every company he upgraded, acknowledging fundamental weakness, while seeing upside. Here's a roundup: