Chipmaker Index Less Accurate After Revisions, Gleacher Says

The Philadelphia Semiconductor Index has understated the chip industry’s gains this year because of a record number of changes in the benchmark and the inclusion of LED and solar stocks, Gleacher & Co.’s Doug Freedman said.

The index, owned by Nasdaq OMX Group Inc., underwent 109 changes so far this year, compared with 41 changes in 2009, two in 2008 and one in 2007, the San Francisco-based analyst wrote in a note today. The Philadelphia Index has advanced 9.5 percent in 2010, while Gleacher’s own semiconductor measurement has rallied 19 percent, Freedman wrote. Gleacher includes 29 companies, 15 of which aren’t in the Philadelphia Index.

“The fact that the semiconductor industry does not have an accurate relative index is a new and growing problem,” Freedman wrote. “We can say with a high degree of confidence that the SOX Index is quickly losing its luster as an accurate barometer on semis.”

The changes in the Philadelphia index have included reweighting of members and the inclusion in the list of 30 companies of such higher-growth stocks as Cree Inc., a maker of energy-efficient lighting products, and Rubicon Minerals Corp., which makes crystalline products used in LEDs. Both companies have underperformed the Standard & Poor’s 500 Index’s 7.4 percent gain this year.

Gleacher’s index of semiconductors includes such stocks as Micrel Inc. and Qualcomm Inc. and has outgained the S&P 500 by 11 percentage points year-to-date, he said.

Weakening Correlation

The discrepancy in the indexes “is a reflection of the SOX chasing higher growth names (i.e., LED/Solar exposed) in order to increase visibility,” Freedman wrote. “It would be prudent for investors to now look beyond semi-centric indicies to gauge relative strength. The correlation of GLCH semi stocks under coverage relative to the well-known semi indicies is increasingly weakening.”

The industry has evolved beyond traditional chipmaking companies, according to Nasdaq OMX Group. “Semiconductors are no longer used exclusively in computers,” the company said in an e-mailed statement. “They are also used in a wide variety of products -- including solar panels, smart phones and kitchen appliances. The PHLX Semiconductor Sector Index is more relevant than ever due to the increase in the number of companies that are included in the index.”

The Philadelphia Semiconductor Index rose 1.1 percent to 391.33, the highest since Nov. 8, at 4 p.m. in New York. The S&P 500 slipped 0.2 percent to 1,197.84.

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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