Historical Context for Near-Maniacal Chip Stock Surge
Your worst nightmare as an investor probably goes something like this: A stock that you like but don’t own begins to rocket, and you start to pray for a pullback so you can finally get in. But the pullback doesn’t come and before you know it the stock has doubled or tripled.
Finally, you can’t take it anymore, and you convince yourself that Wall Street’s increasingly glowing forecasts for the company must be on target--otherwise, why would the stock have climbed so far? So you buy it. And shortly thereafter the price collapses.
That scenario, except for the last sentence, has already played out with stocks of semiconductor companies this year. Shares of industry leaders Intel, Texas Instruments and Micron Technology all have more than doubled since Jan. 1, leading this year’s astounding rally in technology stocks.
On Tuesday the computer chip makers’ shares surged again, after brokerage Morgan Stanley & Co. reportedly raised earnings estimates and its price targets for the stocks. Intel, for example, is worth at least $75 a share, Morgan gushed. The stock jumped $3.25 to $65 on Tuesday.
Is this a fool’s game? Many investors know instinctively to shy from stocks that are gripped by manias, as evidenced by a near-vertical ascent in price over a short period. Certainly, the near-term risk in buying chip stocks is far higher today than six months ago. Even so, a little history--and relativity--may be useful in judging this rally.
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For starters, this isn’t the first such craze for the stocks. They have been prone to price spikes since 1970, a function of the business’s traditional cyclicality. And in that historical context, this rally looks like it still has legs: Through Monday, the Standard & Poor’s semiconductor stock index was up 80.7% from the Oct. 6, 1994, starting point of the current rally, according to Birinyi Associates. If it stops here, it would only be the eighth-best chip stock rally since 1970.
Second, compared to the market overall, chip stocks still appear to be relatively cheap.
If Intel earns the $4.70 a share in 1995 estimated by analyst Richard Whittington at research firm Soundview Financial, the stock now sells for less than 14 times earnings. That is below the average price-to-earnings ratio of about 15 for U.S. blue-chip stocks--most of which have nowhere near the growth prospects that Intel does.
Indeed, the driving force behind the tech rally in general this year and the semiconductor rally in particular has been Wall Street’s increasing trust that booming demand for computers and other high-tech equipment is a secular trend: It has been ongoing for most of the ‘90s so far, and it will run through the end of the decade, the bulls say.
Giddy extrapolation of any trend is dangerous, of course, but it hardly seems a stretch to suggest that the number of computers in use worldwide by the end of this decade will be much greater than the number today. Since 1992 alone, the number of personal computers installed globally has climbed from 106 million to 153 million, says Dataquest Inc.
The burgeoning demand for technology in business may be obvious, but perhaps less appreciated is the appetite for technology at the personal level, Whittington says. “We’re talking about one of the great changes in the way people conduct their lives,” he says. Computers, pagers, cellular phones, interactive TV--all are products desired by people everywhere. And all are based on the enabling power of computer chips.
“I think this is what the investment community is coming to grips with” in driving chip stocks up so sharply this year, Whittington says.
Fair enough. But history demonstrates that whenever demand for a product soars, supply eventually increases to satisfy that demand. Often, supply turns to oversupply. Product prices and profits--and stock prices--then fall.
If there is one worry that bedevils semiconductor stock owners today, it is that cyclical issue--that excess supply is coming sooner than later. Brokerage Hambrecht & Quist estimates that roughly 100 projects are under way around the globe to expand semiconductor production.
“That’s bothersome” from Wall Street’s selfish point of view, admits H&Q; analyst Mark FitzGerald. Even so, he adds, “the unknown factor is the growth of demand.” Thus far in the ‘90s, he notes, analysts have consistently underestimated chip sales because they haven’t foreseen all of the new uses for those electronic brains.
Perhaps the best way to approach chip stocks at these prices is like so: To buy today, you need only to believe in the secular trend--and be willing to ride through the cycles within that trend.
Between 1989 and 1990, Intel stock also doubled, before falling 46% in the 1990 bear market. A disaster for anyone who bought at the ’90 peak? Not if they held on. You would have paid a peak price of $13 in ‘90--which means your gain to date would be 400% and counting.
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Chip Rally, In Perspective
Although the 1995 surge in semiconductor stocks has been spectacular, it has been less so than most other rallies in the group since 1970. The 10 biggest rallies since then:
Number Semiconductor Rally period of days stock index gain 8-11-82 to 1-11-84 518 +133.8% 10-22-86 to 10-7-87 350 +114.9% 11-24-71 to 1-10-73 413 +101.5% 7-8-70 to 5-5-71 301 +96.1% 4-13-92 to 1-18-93 280 +89.7% 12-24-74 to 7-9-75 197 +85.3% 4-16-80 to 11-26-80 224 +80.8% 10-6-94 to Monday 256 +80.7% 2-22-78 to 8-9-78 168 +72.8% 10-10-90 to 6-3-91 236 +67.8%
Based on Standard & Poor’s semiconductor stock index.
Source: Birinyi Associates
