Replies to post #2952 on Sector Investing

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WEEKLY OUTLOOK, Apr. 26
By Jody Osborne, Optionetics.com
4/26/2004 7:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10283

Earnings season continues at full force this coming week and had an impact on trading last week. The major market indices gained ground last week, although gains were minor for the Dow ($INDU) at 0.20 percent. The S&P 500 ($SPX) added 0.53 percent, but it was the Nasdaq ($COMPQ) that really experienced a strong week, rising 2.71 percent. Economic news continued to be an important part of traders’ decision making, with Fed Chairman Greenspan speaking about the state of the economy and a number of economic reports released. With the odds increasing for a rate hike by August, traders have been hesitant in buying stocks.

Despite the fact that interest rate fears have kept stocks from rising too high, the fear indices continue to move lower. Last week, the CBOE Market Volatility Index ($VIX) fell 6.22 percent to close at 14.01. However, intraday on Friday, the VIX fell to a new 52-week low of 12.89. The Nasdaq Volatility Index ($VXN) gave up 8.29 percent last week to 20.68. This index is also near a new yearly low, coming within 0.22 points of its 52-week nadir. What this normally tells us is that there is complacency among traders.

Though stocks have not risen substantially, it seems traders are not too concerned with lower stock prices. Unfortunately for the bulls, when complacency sets in, it often signals a market top.

Traders will get a better idea of sentiment among consumers and traders this week from several sentiment reports. Overall, this week will see a large number of economic releases, as shown below:

Monday: UBS Index of Investor Optimism, New Home Sales

Tuesday: Chain Store Sales Snapshot, The Conference Board Consumer Confidence, Existing Home Sales

Wednesday: MBA Mortgage Applications Survey, ABC News/Money Magazine Consumer Comfort Index

Thursday: Jobless Claims, Employment Cost Index, GDP, The Conference Board Help Wanted Index

Friday: Personal Income, NAPM-NY Report, University of Michigan Consumer Sentiment Survey, Chicago PMI

Besides a number of sentiment reports, traders will get a couple of manufacturing releases to digest. It has been apparent in recent manufacturing data that this sector of the economy is nearly in full expansion mode. However, economists still want to see improvement in the employment component of these reports, as well as a drop in prices paid. In fact, inflation is the major topic right now among economists.

The report that might garner the most attention this week is the preliminary report on first quarter GDP. The consensus estimates is for growth to have accelerated by 5.2 percent in the first quarter following a 4.1 percent increase in Q4 2003 and 8.2 percent in Q3 2003. This is nearly unprecedented growth, as growth has not exceeded four percent for three straight quarters in more than 10 years. However, the flip side to this stellar growth is the concern that the Fed will hike up interest rates sooner rather than later. Of course, the main ingredient for the Fed will be the employment report due out in a couple of weeks.

Though the economy continues to get a lot of attention, this week will continue to see a larger number of earnings releases. In fact, the Dow will see six components announce, with about 130 companies on the S&P 500 set to report. So far, first quarter earnings have been strong, like expected. However, when expectations are high, it is difficult for stocks to move higher even on strong results. Nonetheless, there have been several individual stocks that have risen sharply on strong earnings news.

The Dow components set to report this week are Verizon (VZ), McDonald’s (MCD), DuPont (DD), Boeing (BA), ExxonMobil (XOM) and Proctor & Gamble (PG). Other major companies on tap include R.J. Reynolds (RJR), Comcast (CMCSA), Halliburton (HAL), JDS Uniphase (JDSU), Time Warner (TWX) and Lockheed Martin (LMT).

This past week saw the likes of Microsoft (MSFT) announce and move higher on the news. However, it has been tough for some companies, including Amazon.com (AMZN). This online auctioneer announced strong earnings, but concerns over valuation brought the stock down on the news. If you have option positions in companies that are set to announce earnings, make sure you understand the risk. Even an announcement in a competitor can have a major impact on your position.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jody's Forum

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From Briefing.com: 7:40AM KEM upgraded at Thomas Weisel 13.50: Thomas Weisel upgrades Kemet to Peer Perform from Underperform, given the improving fundamentals, successful internal restructuring efforts and earnings, while still very depressed, are more likely to be revised upward than not. Datapoints point to continue improvements in demand. Arrow is seeing lead times stretch and pricing firm for both tantalum and ceramic capacitors in Asia. Several EMS customers have pointed out that lead times for components, and capacitors in particular, are stretching. The datacom and telecom markets (60% of revenue) are clearly picking up. The firm believes that KEM and AVX shares should now trade at a similar multiple.

7:37AM Xilinx chosen by Lucent; announces new RapidIO availability (XLNX) 36.59: Co announces that Lucent (LU) has selected Xilinx FPGAs for its new 10Gb/s Tunable Optical Translator Unit, a key component in one of its DWDM-based metro optical equipment offerings.... Separately, the co announces the availability of a new RapidIO Serial Endpoint intellectual property core. Coupled with Xilinx' parallel RapidIO endpoint IP core and PICMG-compliant AdvancedTCA Development platform, this combination provides the industry's only complete FPGA-based solution.

7:34AM Anadigics beats by a penny, guides Q2 in line (ANAD) 6.21: Reports Q1 (Mar) loss of $0.40 per share, $0.01 better than the Reuters Research consensus of ($0.41); revenues rose 31.7% year/year to $21.2 mln vs the $20.4 mln consensus. Co also guides, sees Q2 loss of $0.37-0.39 vs the R.R. consensus of ($0.37).

7:08AM Veeco Instruments beats by $0.03, guides Q2 below consensus, annouces order (VECO) 27.43: Reports Q1 (Mar) earnings of $0.11 per share, $0.03 better than the Reuters Research consensus of $0.08; revenues rose 22.9% year/year to $94.5 mln vs the $88.8 mln consensus. Company sees Q2 EPS of $0.11-0.14 vs consensus of $0.16 on revenues of $95-100 mln, consensus $97.4 mln. VECO also announces that it received an order in excess of $10 mln for multiple metal organic chemical vapor deposition production systems from Fujian Quanzhou Sanan, Chinese manufacturer of high brightness light-emitting diodes (HB-LEDs).

http://finance.yahoo.com/mp/q?tqnt

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Is the Chip Dip a Buying Opportunity?
By Monica Rivituso
April 27, 2004

http://www.smartmoney.com/sectorpatrol/index.cfm?story=20040427

AFTER SEVERAL disappointing years, semiconductor stocks served up a stellar performance in 2003. The Philadelphia Semiconductor Index soared more than 75%, far outpacing the 26% rise in the Standard & Poor's 500 and even the Nasdaq's 50% gain. And some stocks were positively white-hot: Shares of Broadcom (BRCM) rallied 126%, while Atmel (ATML) surged 170%.

But the group has taken a bit of a breather in 2004. The SOX has fallen more than 6% this year, while Intel (INTC), STMicroelectronics (STM) and Linear Technology (LLTC) have slumped 15%, 16% and 11%, respectively.

Does the dip represent a buying opportunity — or a hint of more pain to come?

Recent earnings reports paint a rosy picture for the rest of the year. Broadcom, Microchip Technology (MCHP) and Xilinx (XLNX) all recently topped consensus expectations, while STMicroelectronics, California Micro Devices (CAMD) and On Semiconductor (ONNN) have ratcheted up sales and earnings guidance in recent weeks. Scottsdale, Ariz.-based market research firm In-Stat/MDR forecasts that sales will rise another 29% this year to $214.7 billion.

The question on many investors' minds is, will rising interest rates choke off economic growth in general and chip sales in particular? Perhaps not. Semiconductor makers' earnings — and stocks — generally continue their upward trajectory during the early stages of a tightening cycle, say analysts at Merrill Lynch. And this time around, with rates still hovering near 40-year lows and inflation low, rising rates might have less of a dampening effect than usual — meaning chip stocks could make another leg up.

And chip cycles don't necessarily coincide with the broader economy. Chip booms and busts, generally lasting between five and seven years, are almost purely functions of supply and demand. During the booms, demand for chips increases and capacity to manufacture them tightens, boosting prices and sales in the process. During the busts, slack demand and overcapacity lead to plunging prices. In the current boom cycle, most industry watchers expect growth to peak sometime in 2005.

But Walden Rhines, chief executive of Mentor Graphics (MENT), sees this cycle playing out a little differently. Back in 1999, he says, chip companies devoted gobs of money to building fabrication plants. But after the bust began in 2000, those plants weren't filled with equipment. Companies are just now outfitting some of those empty shells with new machines and putting some of that unused manufacturing space to use. That means additional capacity will be brought on line in a much more orderly fashion than usual, which could lengthen the current boom cycle to 2007, according to Rhines.

Other observers disagree. Brian Matas, vice president of market research of Scottsdale, Ariz.-based IC Insights, says chip industry upturns have grown shorter over the years, not longer. During the last boom, there were only six quarters of positive sales growth before the bottom fell out in 2000. And six upbeat quarters is what he figures the cycle will amount to this time as well. That means growth should continue this year, but in the first or second quarter of next year, he expects things to slow. "We're not feeling too good about how things are panning out for 2005," says Matas.

The ramp-up in chip-equipment purchases is only adding to his concern. IC Insights' capital-spending forecast for this year calls for chip makers to spend 53% more than last year, or $44.4 billion. "We have the potential now to have this excess capacity available, and that puts pressure on pricing for these parts," says Matas.

The current cycle isn't likely to be very different from past ones, says Matas. Historical patterns, the ramp-up in capital spending and robust chip sales all argue for a downturn to begin next year.

Regardless of which camp you belong to — the giddy optimists or the gritty realists — there's no denying that, despite last year's stunning rally, chip stocks appear relatively cheap right now. As a group, they trade at a price/earnings-growth, or PEG, ratio of 2.11, lower than the S&P's PEG of 2.28. Chip stocks generally trade at a premium to the broader market.

Some might argue that the discount is a result of investors betting that chip earnings growth will begin to decelerate next year. Perhaps they'll be proven correct. But investors who just can't overlook a low PEG might consider two exchange-traded funds based on the chip sector. Merrill Lynch's Semiconductor HOLDRS (SMH) track 20 chip-related stocks. (HOLDRS are similar to ETFs in that they follow a basket of stocks, but they can also be unbundled, allowing investors to trade the underlying components separately.) The fund is heavily weighted in three stocks: Intel, Applied Materials (AMAT) and Texas Instruments (TXN), which respectively account for 30%, 26% and 22% of the holdings.

A more diversified play is the iShares Goldman Sachs Semiconductor Index Fund (IGW). The fund tracks chip-related companies as well as some multimedia companies, but the top 10 holdings, including Motorola (MOT), Texas Instruments and Applied Materials, comprise a little more than 61% of the fund.

Chips may have dipped, but that doesn't mean they've crumbled — yet.