Dylan McGrath EE Times (11/19/2009 7:36 PM EST)

SAN FRANCISCO—Chip stocks swooneed Thursday (Nov. 19) after a Wall Street analyst downgraded the sector. But the editor of a semiconductor investment newsletter called the downgrade "baseless."

BofA Merrill Lynch analyst Sumit Dhanda downgraded the chip sector to "neutral" from "buy" Thursday, warning that rising inventory levels in the supply chain could lead to a correction in semiconductor stock values. Chip stocks traded lower on the downgrade.

But Paul McWilliams, editor of Next Inning Technology Research, wrote in a note to clients that there is no evidence of an inventory buildup at this time. Inventory levels at the company's tracked by his firm have been consistently moving down since the fourth quarter of 2008, McWilliams wrote.

"What I think is going on here is we're seeing some analysts who have been consistently wrong this year try to explain why semiconductor revenues are coming in so much higher than they have been forecasting," McWilliams wrote.

Concern over inventory levels has been heightened in recent weeks as the chip industry emerges from a sharp downturn. But other analysts have also said that inventories remain lean. Last week, market watcher VLSI Research Inc. said chip inventory levels remain low by historical standards, despite reports by some chip makers of higher inventories.