Halftime: Street Recklessly Selling Chip Stocks?

The S&P fell Monday, not only weighed down by worries about higher oil but investors were also spooked by a downgrade that triggered a sell-off in the tech sector.

Specifically, Wells Fargo downgraded chip stocks broadly, suggesting many of these names had gotten ahead of themselves.

The semiconductor index is up 45 percent since the start of September, roughly when the market's recent rally began, while the broad S&P 500 rose about 25 percent in that period.

However the Fast Money traders spoke with the Wells analyst who made the downgrade, and they think investors may be throwing out the baby with the bath water.

What’s the Street missing?

In a live interview analyst David Wong explains that although the downgrade was from 'Overweight' to 'Market Weight' he’s not bearish by any stretch. “I do think great opportunities remain in the chip sector,” he says. "I think excellent investments remain to be made in the space."

The key he says is to pick and choose. That's what he intended to communicate. “My downgrade signals a need to be more selective,” he says.

And that leads to the obvious questions. Which stocks are currently attractive?

Wong suggests six names belong on the radar. Xilinx and Altera are two stocks that he still rates as outperform. “They’re very highly profitable companies,” he says. He also likes Analog Devices and Linear Tech.

However, on the sell-off he says the biggest opportunities are in Intel and Qualcomm. “These are stocks that have particularly strong fundamentals. Intel has recovered nicely from the glitch in its Sandy Bridge chip set. And Qualcomm is an excellent tablet and smartphone play,” he says.

Trader Zach Karabell largely agrees. When sell-offs are triggered from a downgrade rather than a shift in fundamentals he sees it as an opportunity. “Qualcomm is a perfect example,” he says. “I’m thinking of adding a little more today.”

Pete Najarian isn’t sure chip stocks have pulled back enough to establish a new position. “At $57 Qualcomm is only a few dollar off it’s 52-week high,” he reminds.

Brian Kelly is far more cautious. “Oil at $105 is a fundamental change,” he argues. “If the consumer is going to be pinched by gasoline prices they’re not going to buy as many computers.”

However, Kelly does agree that some stocks belong on the radar, just not these. Instead he likes QLogic and Emmulex as cloud plays. “Stick with the data center buildout,” he says.

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* For your convenience, here are the Wells Fargo top picks again; listed all in one place.

Wells Fargo Top Chip Picks
Intel
Qualcomm
Linear Tech
ADI
Xilinx
Altera

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TRANSPORTS GETTING HIT HARD

As we mentioned above, higher oil dragged down the market broadly with oil-related stocks taking it on the chin. As you might expect, trasnports were among the hardest hit.

What's the trade?

"I would be out of transports," says Brian Kelly. "I think we’re looking at a sustained period of high oil prices."

Zach Karabell agrees. "Avoid companies that are harmed by higher oil, those that can not pass along the costs," he says.

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Trader disclosure: On Mar. 7, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Steve Grasso owns (ASTM), (BA), (BAC), (BWC), (C), (CSCO), (JPM), (LIT), (LPX), (MT), (MHY), (NDAQ), (PFE), (PRST) and (S). Zachary Karabell owns (FCX), (AAPL), (RIMM), (GE), (FXI), (GOOG) and (C).
Pete Najarian owns (F) bonds. Pete Najarian owns (C). Pete Najarian owns (MS). Pete Najarian owns (CNI). Pete Najarian owns (TCK). Pete Najarian owns (GE). Pete Najarian owns (BAC) calls. Pete Najarian owns (JPM) call spreads. Pete Najarian owns (KH) call spreads. Pete Najarian owns (MU) calls.

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STEVE GRASSO
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ZACHARY KARABELL
Karabell and River Twice Capital Own (CSCO)
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BRIAN KELLY
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JOHN STEPHENSON
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DAVID WONG
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