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SIVY ON STOCKS from money.com
December 11, 2000

Bad news bulls
The news may be rotten for semiconductor stocks, but investors are betting
on a rebound for leaders like Intel.

By Michael Sivy

Over the past few months, I've been warning readers that the technology
sector remains in a broad downtrend that could last well into next year.
Nonetheless, when tech stocks have been beaten down badly enough, shares of
the strongest companies can rebound even in the face of continuing bad
news, provided their long-term prospects are good enough.

Exactly that sort of bad-news rebound has occurred for Applied Materials,
the leading maker of semiconductor manufacturing equipment. Last week I
wrote that the battered stock would remain volatile and could face a
further decline of 10 percent to 15 percent. But I concluded that the
shares were so cheap at $38.50 that the upside was 10 times as great as the
downside. That proved true a lot faster than I expected. In the five
trading days since that column ran, the stock has jumped 32 percent to
nearly $51 a share.

Admittedly, my good timing was largely luck, but the power of Applied
Materials' comeback is a signal that other leading semiconductor stocks
also may have fallen too far. As a rule, if you're considering stocks in
the midst of bad news, it's smartest to stick with industry giants that
have bullet-proof balance sheets. You can be confident that they'll ride
out whatever bad conditions lie ahead, and they may even benefit as smaller
competitors are forced to give up market share.

On that basis, I'd certainly be inclined to look at Intel. Though it's the
world's leading chipmaker, with $34 billion in annual sales, Intel has
spent the year fouling up. Among the more spectacular errors, the company
ran short of capacity because it underestimated demand last year and cut
back capital spending. In addition, glitches were discovered last summer in
Intel's turbocharged Pentium III, and many of the chips had to be recalled.

Frankly, none of those failures will have much long-term impact. Intel
remains the industry's 800-pound gorilla and long-term earnings growth is
projected at more than 20 percent a year. Most analysts see continuing
weakness in the chip market for the next six months, but see the cycle
swinging up by late next year.

In September, Intel warned that third-quarter earnings would be lousy, and
the stock fell by $13 to $48 a share. At the time, I wrote that the stock
was down to buyable levels but that it wouldn't rebound right away. Over
the next three months, Intel sank to less than $32 amid a general selloff
in technology. But after announcing on Friday that fourth-quarter results
would be disappointing because of soft personal-computer sales, Intel
rallied. On Monday, investors followed through by bidding the stock up
another $3.50 to $37.50.

Investors are clearly betting that the worst is over. And with the stock
only about 20 percent above its lows (and 50 percent off its highs), I
think it makes sense to get on board. After revising their 2001 estimates
downward, analysts expect Intel to earn about $1.50 a share next year. At
the current share price, that's a 25 P/E -- cheap for a 20 percent core
growth rate. If Intel is missing from your portfolio, this may well be your
best opportunity for years to come.



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