When/How did SWKS fall out of favor here?

Investment Analysis Clubs Saul’s Investing Discussions
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For quite a while, Saul was a huge fan of SWKS:

The July 2015 Knowledgebase article (http://discussion.fool.com/our-new-improved-knowledgebase-ed-2-j…) says things like:
I’m not sure I can come up with a single calculation that will give you all the information that went into my thinking about SWKS, for instance. For me it was the CEO explaining how they are included in the planning way in advance, and how they are an integral part of a complicated system, and my concluding that no one is going to replace them because they find a new supplier a dollar cheaper. They simply can’t! They are in all the platforms long-term. And their margins are rising to prove it. And the CEO said that they are in every manufacturer, and almost every platform of every manufacturer. Holy Mackerel ! And they are at a PE of 25 with a rate of growth of trailing earnings of 77% ??? The market is blinded by them being up over 100% in the past year, but if investors would stop price anchoring and look at them as they are, right now, they’d see them as wildly undervalued. (Gee! I might convince myself to buy some more!) It’s hard to imagine a single metric that would give one that much confidence. It’s largely subjective, I think.

Then in a SKWS Nov 2015 mid-quarter review (http://discussion.fool.com/skyworks-swks-mid-quarter-review-3200…), it was Saul’s largest position and he was as excited as ever.

In the subqequent SKWS Feb 2016 mid-quarter review (http://discussion.fool.com/swks-my-mid-quarter-review-32116312.a…) Saul said:
This is where Skyworks comes in with their analog expertise. Because analog signal processing is a lot more difficult (compared to digital) not many companies bother with building up the needed expertise, especially if they are primarily interested in digital data. Skyworks not only provides this expertise but also integrates a large amount of analog circuitry in prepackaged IC (integrated circuit) chips. The result is that their customers (like Apple) do not need any analog expertise, do not need to figure out how to integrate multiple analog chips, and can trust that the incoming digital signal is high quality ready for use. [I’d suggest you go back and re-read this paragraph]

SWKS has every earmark of what Buffett would call a durable competitive advantage (at least, to the best of my limited understanding - othalan). I see this expertise in analog circuitry, combined with their market positioning, as the source of this durable competitive advantage."

My kind of company!

Then in total portfolio review at end of March, 2016 (http://discussion.fool.com/my-portfolio-at-the-end-of-march-3218…:slight_smile:
This month I reduced SWKS and SKX a bit as they had been just too large a percentage of my portfolio. (Emphasis mine) But it was still one of his 3 largest positions.

But the very next month (April 2016), Saul re-added to SWKS (http://discussion.fool.com/test-32227252.aspx) “Why I reduced INFN, but added to SWKS” (also repeated in http://discussion.fool.com/how-this-q-earnings-are-doing-week-3-…:slight_smile:

I wrote that although I really like the company, its prospects, and the management, I decided I had had too much in SWKS so I reduced the size of my SWKS position by a third from 21% to 14%. I said that I planned to just hold it. The price was only $72, and the PE was 13.
They had a great earnings report and the market didn’t recognize it and sold off reflexly. … At any rate I increased my shares in SWKS by 16% on Friday. It is now about 14.2% of my portfolio, even after the sell-off, and has a PE of 11.7%

But, just a couple weeks later, Saul decided to sell again (http://discussion.fool.com/may-brief-reviews-on-all-my-positions…:slight_smile:
Although I really like the company, its prospects, and the management, I decided I had had too much in SWKS (and in other companies that make and sell tech products like AMBA, INFN, etc) so I reduced the size of my SWKS position by a third from 21% to 14%. I will now just hold it, especially as the price is only $62.40, and the PE is 11.

Which now brings us to Saul’s great summary from a couple weeks ago (http://discussion.fool.com/hx-of-the-progress-of-my-positions-co…:slight_smile:
Skyworks (SWKS) – As you know I had been reducing and reducing and reducing my position. Now it’s gone. For a long time I had a lot of faith in management, but I now realize that they were just whistling in the dark. Skyworks may do well depending on whether Apple has a good year, but I realized that they will never be the master of their own fate. Compare Amazon, PayCom, HubSpot, SalesForce, Shopify, for example. They can go out and find and sign up a myriad of small customers, who then become tied in forever. Skyworks, on the other hand, is dependent on a few large, powerful customers who are always looking out for a supplier with a better or cheaper product, and who also don’t want to be dependent on a single supplier. I closed out my position. My history was mediocre. I initially bought over two years ago at $52. It went up to $110 at one point and then melted down again, and I finally sold my last in the mid-$60’s. I wish I could say that I was smart enough to sell it all out over $90, but I wasn’t. I sold some at the high prices because those high prices were making my position size too big, and started reducing it down from 22% to 18% to 16% to 14% to 12% while the price was gradually dropping, so I sold all along the way. I’d buy a little too, but issues kept coming up about competition, and especially about the technology, and I realized that I simply wasn’t technically savvy enough to evaluate the situation. In additionally they were in a tough sector, as I said above with large powerful customers. Anyway, I’m gone.

I’ve scoured the board between May and August and don’t see a discussion of SWKS falling out of favor here. Do you all agree with Saul? I still like SWKS, and think that if management is on track for their 2nd half of the year will be much better, why are smart people getting out of the stock now?

I note that since him telling us he was out (Aug 7), the stock as risen almost 11%, to $73.78. So, I’m glad I’m behind on tracking the discussion…

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I’ve scoured the board between May and August and don’t see a discussion of SWKS falling out of favor here. Do you all agree with Saul? I still like SWKS, and think that if management is on track for their 2nd half of the year will be much better, why are smart people getting out of the stock now?

Smorg,

Ant and I cast a few of our doubts in this thread in early July: http://discussion.fool.com/swks-don39t-loose-sight-of-the-simple…

Saul was still bullish on 7/8: http://discussion.fool.com/good-for-apple-and-hence-swks-3230829…

On 7/17 Matt was bullish but I again argued that margins could/should contract: http://discussion.fool.com/swks-great-way-to-play-iot-trend-3231…

On 7/18 Saul explained that he had doubts: http://discussion.fool.com/a-question-about-skyworks-32319703.as…

Bear

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Smorgasbord1 - I’m still bullish on SWKS with a $62.21 cost basis currently, but only at a few percent of my portfolio. I just keep remembering the CEO saying during an earlier earning call he knew the 2nd half of the year is going to do well implying the orders were already set to happen. Things do change, but that is what has kept me in.

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Here is the problem: Great companies and their stocks are never “cheap”. The market is too smart, and we cannot outthink it.

This explains why I have never made money buying on the basis of a PE ratio.

I have made a lot of money buying on the basis of discounted future expected cash flows (or predictions thereof). Using that methodology great “overvalued” companies were found to be really undervalued although still “overvalued” on PE basis.

Not that one needs to use DCF but in many instances it provides evidence as to what your gut is saying.

PE is a mostly worthless metric as the market discounts the future perceived value of the company and could care less as to its trailing or current PE when it is perceived discounted future value that is relevant.

I have noticed that great companies and stocks always remain “expensive”'even when they crash. ISRG, as an example fell into the $90s at one point, and it still was expensive on traditional valuation and conventional wisdom (albeit not on a 10 year DCF basis).

ISRG is now much more reasonably valued at $400 than it was at $90. Yet better returns were available when it was less reasonably valued.

If a stock falls to a 13 PE then despite its story, something is amiss. 13 PE implies little future perceived valuation growth of the business, and thus potential returns. But it sure is cheap.

It is very rare that the market gets that wrong in regard to low PEs. Instead,in my opinion what you want is not a low PE (which are money losers) but companies cheap compared to perceived long term discounted business value.

At one point SWKS was I’m sure an “overvalued” stock. May be counter intuitive but it is analytically correct.

This is one reason such stocks are so volatile, but the real long term risks are business performance and not buying in a bubble (which means future perceived valuation (discounted or not) is already in the share price.

Tinker

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Personally, it seems to me SWKS fell out of favor here more because of the nature of the company rather than because of its potential as an investment.

SWKS has a difficult to understand and boring product. Compare to some of the other companies which have been talked about for a long time this year:


LGIH - We all know what a house is and why someone would buy one.
AMZN - We all either buy from them or know someone who does.
SKX  - We all wear shoes and know what feels good on our feet.
BOFI - We all use banks and most of know how a loan works.
AAPL - We all either use or are familiar with their products.

SWKS - Umm ... how do analog IC chips effect me?

Another big difference between SWKS and most of the products here is that they never sell direct to consumers. They are a “second tier” product and will, as Saul noted, never be the master of their own fate.

This can be seen as either a good or a bad thing depending on your investment philosophy. If I had Saul’s skill in investing I may not care for this. I do not. So instead I view this as a good type of company to invest in.

I have no clue which companies will sell the most cell phones.
I have no clue which companies will sell the most IoT products.
… BUT …
I see both cell phones and IoT products in ever increasing numbers.
I see the importance of wireless communication increasing every year.
I see the complexity of wireless communication increasing every year.

SWKS may not be a master of their own fate but they create a component critical to these trends. Personally, I like this.

However, even if I am right about the trends and right that SWKS is a company poised to take advantage of these trends, the timeline for showing profit on these trends is at best uncertain because their own future profits can only be evaluated in terms of the future profits of other companies. A guessing game based on results of another guessing game? Sounds difficult at best.

Even ignoring that uncertainty, the boring and hard to understand nature of their products means we will probably never see the stock price significantly over-valued (high P/E). Easy to get excited about a new iPhone. Not so easy to get excited about a new frequency filter.

Something else I see a lot of, including in myself: When excited about a company it is easy to gloss over their faults. When not so excited by a company it is equally easy to enhance their faults. I see a lot of this happening in the discussions of SWKS over the course of this year.

That is my view. I may be wrong. For now I am happy to hold on to SWKS as one of my larger positions.

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othalan,

One problem you aren’t considering is the starting point. Right now SWKS’s margins are sky-high. Can they keep it up? How? What is their competitive advantage?

The theory was that their product was differentiated and that no one could provide a proper substitute…do you still believe that? Do you still think switching costs are high? If there are convenient substitutes, margins get crunched.

Basically, unless you understand the tech, it’s very hard to predict SWKS’s fate. It’s a complicated competitive landscape, and I don’t feel like I’m able to understand enough about it to be an investor in the space.

Bear

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Bear: The theory was that their product was differentiated and that no one could provide a proper substitute…do you still believe that? Do you still think switching costs are high? If there are convenient substitutes, margins get crunched.

Bear,

In the past few months I have realized I really don’t care about understanding the details of SWKS products. Even though I personally do have the expertise to understand. Just for the record …

I still believe SWKS has a significant edge in technical expertise.
I still believe SWKS has a 1 - 2 year lead on any direct competition.
I still believe SWKS products are saving their customers significant money.

But this is now a minor issue to me as I look at SWKS.

At a philosophical level I love technical expertise. But as an investor it seems technical expertise really only creates an initially viable company and possible quick short term gains. Long-term technical expertise seems far less important. I think SWKS is past the point where technical expertise is the primary concern for my investing thesis.

This will almost certainly change again as I learn more about investing, but at the moment I have three qualities I pay close attention to in a company for long-term performance:

Brand name recognition
Customer relations
Management quality

SWKS is working with the phone manufacturers to create solutions from the beginning of product development. To me this indicates good customer relations (about all I have to go on based on the limited insight we have into their interactions with their customers).

This also indicates that at least some of their products have not been comoditized, otherwise why would they need to work with customers on future design requirements?

SWKS products are in a LOT of devices. This shows good brand name recognition. People like to use known brands and individual people make purchasing recommendations. Price can of course trump brand name recognition in a corporate environment but I do not see an indication of anyone with a better price at this time.

SWKS management seems as trustworthy as any I have found. But I admit I am still learning how to evaluate how much I trust management for a company. (Side note: I never trust statements about future performance by management so I really don’t care what the CEO said about the second half of this year compared to the reality so far)

Innovation is also nice to see (and it appears SWKS is still innovating nicely), but even this seems relatively minor long-term.

Those are my best thoughts at the moment. Take them for what you will. No guarantees. :slight_smile:

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For quite a while, Saul was a huge fan of SWKS…The July 2015 Knowledgebase article says…

Hi Smorgasbord,

That was over a year ago, when SWKS was booming, saying they had two years advance view into the future, and there was no hint of this drastic slowdown and competition. Here’s what I wrote in my July 2016 Brief Review (that’s this year):

July 2016 – SWKS - My Review
Although I really like the company, its prospects, and the management, I decided I had had too much in SWKS (and in other companies that make and sell tech products like AMBA, INFN, SEDG, etc). I also was concerned about all the competition that seems to be coming out of the woodwork, while on the other hand management keeps saying “Nothing to worry about”. I’m not tech savvy enough to evaluate the competing claims so I’ve been gradually nibbling away at my position for cash now and then, as I have described elsewhere. I will now just hold it, especially as the price is only $62.90, and the PE is 11. It’s still one of my top five, but I can understand the other four (LGIH, SKX, AMZN, and SBNY) and their prospects, a lot better.

It seems pretty self-explanatory to me. You can actually watch my mind gradually changing, and see why.

Saul

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Here’s what I think is a useful general question - how well have companies like Skyworks done? “Like Skyworks” in the sense that they sell important components to better-known companies that make better-known products. It doesn’t have to be electronic parts, though I suppose those companies would usually be the most similar.

An example is Hutchinson Technologies (HTCH), which makes an important disk drive component. Unfortunately, disk drives are being superceded by solid state devices, a very different technology. Skyworks, by contrast, is in the business of superceding its own products with products designed and made the same way as their predecessors.

Other examples are Applied Materials, which makes chip-making equipment; Taiwan Semiconductor, Cirrus Semiconductor, Broadcom…

I’m trying to think of non-electronics companies that do something similar.

What makes for success in this kind of niche?

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I just want to thank everyone who took the time to post their thinking on SWKS, whether pro or con, as well as to sum up the history that I somehow missed.