Merrill Lynch recommends investors dump their shares of six widely held chip stocks, including

Intel

(INTC) - Get Report

.

In a new report, the firm boldly tags the bunch -- also including

Analog Devices

(ADI) - Get Report

,

Applied Micro Circuits

(AMCC)

,

Conexant

(CNXT) - Get Report

,

PMC-Sierra

(PMCS)

and

Vitesse Semiconductor

(VTSS)

-- with the elusive, seldom-glimpsed sell rating.

But the firm says that's not because the semiconductor business has suddenly taken a turn from lousy to lousier. It's just that it's impossible to tell when the sector will rise out of the dumps, and how big the recovery will be. Already, earnings forecasts for 2003 have been scaled back repeatedly.

In light of that, some of the biggest names in the sector look too rich for Merrill's comfort, the bank says, noting that every valuation model it's tried out suggests prices have already factored in a fourth-quarter seasonal upturn. Yet there are signs the hoped-for upturn won't come to pass.

On Friday market research group Gartner Dataquest said the usual holiday spike-up for PC vendors isn't likely to happen this season, citing the gloomy economic situation. It projects global PC shipments will climb only 1.5% from the same period last year.

Just Guessing

The present downturn makes it tough to value chip stocks, Merrill says. Because some of the most cyclical companies don't have any profits, it's hard for analysts to discount future earnings. So to figure out fair target prices, the bank employed a model based on return on operating capital. (For those interested, ROOC is defined as net EBIT after tax divided by opening operating capital. Operating capital is fixed assets plus net current assets, excluding cash and short-term debt).

Merrill's short-take: Intel could have downside of some 26%, assuming a price target of $14.19 from Thursday's closing levels. "We note that the sharp increase in manufacturing assets relative to revenue will increase the pressure on Intel to generate return on those assets," says the bank's report, adding that its estimates already give Intel the benefit of the doubt by assuming generous revenue growth.

"The run-up in

Intel's stock price has resulted as investors react, once again, to seasonal activity that is likely to dissipate as the year progresses, in our view," writes the analyst team, bumping its rating down from neutral to sell.

"At $18," the report sums up, "investors have an excellent opportunity to get on the sidelines and wait for an actual recovery and a stock price that provides sufficient upside for the risk associated with Intel's future."

Other stocks Merrill reckons could be cruising for a fall: ADI could slide 36%; Applied Micro Circuits 16%; Conexant 65%; PMC-Sierra 16%; and Vitesse 46%.