Chip shares may lead broader rally

Semiconductor stocks this week posted their longest rally in almost five years, gaining 20 percent in seven days and buoying investor hopes for an end to the 16-month bear market in US stocks.

The surge in chip stocks may presage a rally in the broader market, some investors say, because semiconductors are used in everything from cars to mobile phones. A rise in chip demand would indicate growth across other industries, they say.

"It looks like the market bottom we saw back in April will be the bottom for this cycle," said Alan Loewenstein, a manager of the John Hancock Technology Fund, which has 30 percent of its US$1.1 billion in semiconductor and chip-equipment stocks.

"Investors still want to buy good growth companies and the valuations are not overly expensive."

Intel shares now sell for 29 times the past 12 months' earnings, compared with 104 times a year ago. Micron Technology Inc, the biggest US maker of personal-computer memory chips, has a P/E of 28, down from 80.

Still, reports showing lower-than-expected consumer confidence and industrial production limited the gains in the broader market. The S&P 500 rose 0.7 percent for the week, the NASDAQ Composite Index climbed 1.8 percent and the Dow Jones Industrial Average advanced 0.9 percent.

The S&P 500, still down 20 percent from its March 2000 peak, has gained 11 percent since touching a two-and-a-half-year low on April 4.

The NASDAQ has rallied 26 percent since early April, leaving the index down 59 percent from its record.

Chip shares surged after Merrill Lynch & Co raised ratings on 19 chip and chip-equipment stocks and Intel Corp Chief Executive Craig Barrett said the biggest chipmaker expects demand for computers to rebound the rest of the year.

Cisco Systems Inc, the largest maker of computer networking equipment, is scheduled to report quarterly earnings next week.

"If Cisco tells us that inventories are under control and they'll be buying more chips, that could get things rolling," Loewenstein said.

The Philadelphia Semiconductor Index rose 6.6 percent for the week, even after giving up 2.2 percent Friday. It is down 52 percent from its March 2000 peak. The seven-day rally ended Thursday was the longest for the index since November 1996.

Even some who doubt predictions that demand for telecommunications and computer-related goods will improve later this year acknowledge that semiconductor shares may be poised for a sustained rise.

"The chips are going to be the leaders," said Philip Orlando, chief investment officer for Value Line Asset Management Inc, which oversees US$7 billion. "We may not see a fundamental improvement in chip demand until second half of 2002, but historically, those stocks rally even before their earnings bottom. If you believe the economy will revive, you have to buy now."

While semiconductors may lead the way, Orlando said he's skeptical that other technology shares will be the biggest beneficiaries of a new bull market. Rather, he predicted a gain in a broader swath of the largest companies.

Money market mutual funds held US$2.09 trillion as of Wednesday, according to the Web site of the Investment Company Institute, a trade group for money managers.

When investors decide to shift back into stocks, managers will have to turn to the larger stocks because they're the easiest to buy and sell, Orlando said. He's been increasing investments in financial and health-care companies such as Loews Corp and MedImmune Inc as well as energy and retail shares.