Chips may have 'more cracks to show' even as Citi reiterates Analog Devices as top pick
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Investment firm Citi reiterated that Analog Devices (NASDAQ:ADI) is its top pick in the semiconductor space due to its defensive nature, even as the research house believes there will be "more cracks to show" in the group, likely coming later next month. 
In a note to clients, analyst Christopher Danely previewed the Citi Global Technology Conference, pointing out that a few of the companies attending could be positive, such as ON Semiconductor (NASDAQ:ON) and GlobalFoundries (GFS), but it's likely that overall commentary will be cautious.
"We expect a mixed bag of commentary, with some semi companies with high exposure to the automotive sector and/or product cycles like ON/GFS to be fairly sanguine about the cycle," Danely wrote in a note to clients.
The analyst added that companies like Analog Devices (ADI), Texas Instruments (TXN) and Intel (INTC) are likely to be "more negative," given that both Texas Instruments (TXN) and Intel (INTC) have high exposure to the PC and wireless markets, while Analog Devices (ADI) reported earlier than its peers.
There's also the possibility that as capacity has shifted from PCs and cell phones to auto and industrials, there will be a decline in lead times in these areas too and eventually result in a correction.
In a separate note, Danely pointed out that the auto and industrial markets are "rolling over," citing commentary from Micron (NASDAQ:MU) and Analog Devices (ADI) and there may be more cancellations ahead.
Danely added that semiconductor companies are likely to see another round of cancellations near the end of September, similar to what Analog Devices (ADI) saw, as lead times continue to decline and a chip shortage may become a chip glut. 
"While we do not expect many semi companies to talk about excess inventory in the channel given they cannot detect it, we expect some customers to talk about excess inventory," Danely wrote in the note, adding that Taiwan Semiconductor (TSM) and Renesas have recently spoken about excess inventory. 
And while Analog Devices (ADI) is the firm's top semiconductor stock to own because of its defensive nature, once the downturn ends, the firm likes Micron (MU), Advanced Micro Devices (NASDAQ:AMD), ON Semiconductor (ON) and Global Foundries (GFS) "given their secularly increasing EPS." 
Earlier this month, investment firm Needham downgraded Analog Devices (ADI) due to concerns about business slowing down for the signal-processing chipmaker.