Chip Stocks: Rolling with the Punches

After pulling back from big gains earlier in the year, Intel and Cypress Semiconductor shares look attractive, says S&P's Clyde Montevirgen

Semiconductor stocks have been dragged through the mud along with many other stocks in this stormy November marked by troubles in the financial sector, the weak U.S. dollar, and near-$100 oil. The good news is, the group is still ahead for the year, after falling behind in 2006. Year-to-date through Nov. 16, the Standard & Poor's Semiconductor index has risen 8.9%, outpacing the 2.9% increase for the S&P's 500-stock index. (Just a month ago, though, the semiconductor index's year-to-date gain was 17.3%.)

Amid the worries about where the economy is headed, the strong earnings and outlook from Hewlett-Packard (BusinessWeek, 11/19/07) (HPQ) were certainly welcome news and helped boost many tech stocks on Nov. 20. "HP's earnings report bodes well for chip companies," says St&P equity analyst Clyde Montevirgen, who has been woefully watching many semiconductor stocks that he follows falter in the last few weeks.

Montevirgen has a positive fundamental outlook on semiconductor stocks overall, and favors companies that make chips for PCs and wireless handsets, given the strong demand for those products. His buy recommendations include Intel (INTC), Cypress Semiconductor (CY), Broadcom (BRCM), Volterra (VLTR), and ON Semiconductor (ONNN).

BusinessWeek.com's Karyn McCormack spoke with Montevirgen on Nov. 19 about his outlook for chip stocks. Edited excerpts of their conversation follow:

Why have chip stocks pulled back lately? Are there worries specifically about chip demand, or are investors just worried about an overall economic slowdown?

I believe that semiconductor stocks have pulled back recently for a few different reasons. First, considering that the second half of the year is usually stronger than the first half, third-quarter results were somewhat weaker than our expectation, and fourth-quarter guidance indicates that results could also be below the seasonal average. On top of that, we see an uncertain economic environment, so the chances of a steeper-than-expected economic downturn could hurt industry sales, especially considering that there's a very high correlation between gross domestic product and semiconductor sales.

Third, a lot of industry forecasters are seeing 2008 as the peak growth year for the semiconductor industry. If you look at the different end markets, handset growth will likely decelerate and consumer electronics growth could slow as well, based on unit sales. Lastly, there's a lot of speculation about double ordering by chip customers—that could slow down results. All of these factors have contributed to the pricing of risk and profit taking, in our view.

What's your outlook for chip sales for 2008?

We have industry sales growth forecasts in the mid- to high-single digits for 2008—that's following our forecast for 4% growth for 2007.