Chip Stocks in Full Retreat

I found this article from 2014 interesting as to headlines and how it could very well be the headline this past week:

http://blogs.barrons.com/techtraderdaily/2014/10/10/microchi…

Obviously many of the names discussed here (SWKS) had runs of 100% gains and one even a 4 multiple over the past year (AVGO) since that article was written.

Conclusion #1: Semiconductor Downcycles affect all chip firms. Nobody will be spared. Chip stocks that have not yet sold off will see selling pressure. Conclusion #2: Downside risk stocks include volatile/beta names like FCS, ONNN, DIOD, ATML; high flyers like SYNA, CAVM, SWKS, TQNT, RFMD, AVGO, NXPI; Memory names that still have not pulled back as much like SNDK, MU; and stocks that have not yet sold off much like INTC, MPWR, IDTI, BRCM & MLNX. Defensive stocks include defensive business model stories like QCOM, MXIM, TXN, LLTC, MSCC; and stocks that have already sold off meaningfully like SLAB, CREE (getting there), and ALTR.

So those who were shaken out of their positions missed quite a run.

Are there parallels today??.

Circumstances today look rather similar to 2014 with the China Syndrome being the predominant fear. China is in all the news for economic slowdown, stock market halts, over leveraged realestate, etc.

As regards SWKS, the fear goes that there is already 90% penetration of the mobile market in China and therefore, handset sales will decline…same issue that took Apple stock down and all its suppliers.

If you believed this in 2014 with the above article, you would have missed extraordinary gains.

OTOH, if the article was correct, would have been best to redeploy assets to another stock(s).

So how did you or do you decide whether this article from a year ago that has already been washed, spun and repeated in 2015…holds true today?

We know what Saul did…bought more even with only a 10% decline from its high in a stock that is up 100% from last year. I was a bit surprised quite honestly because it was only down 10% and there may be more to go in sympathy with the all boats sink phenomenon in chip stocks…also 10% down wasn’t that much additional value creation.

But SWKS may be different from many of the others as perhaps is AVGO.

What may make it different is:

  1. Most of the China phoneset penetration is 3G (or less) at $4 per chipset and the upgrade cycle to higher performance phones sells at $8-12 per chipset. Upgrades don’t have to be as numerous to keep up with or exceed previous year’s sales.

  2. The EPS in 2016 places its PE AT 14 or less…certainly not overvalued so it would seem highly unlikely that SWKS would stay depressed for long below its present value.

  3. SWKS has a broader customer base than just phone sets.

The China Syndrome may yet do more damage to chipsters but perhaps not all chips should be considered alike. The central thesis with SWKS insofar as I can tell, remains intact.

Do you disagree and if so why?

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The China Syndrome may yet do more damage to chipsters but perhaps not all chips should be considered alike. The central thesis with SWKS insofar as I can tell, remains intact. Do you disagree and if so why?

HI Duma, I agree.
Saul

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I would add that SWKS is attractive on a whole range of fundamentals which go a long way to shoring up its perilous business of making techie bits and pieces (I don’t need to point you to examples) and therefore, and only therefore, make it worth a serious investment. My criteria are far tougher than Saul’s and many of the companies discussed here I would not entertain for a minute (which is about what it takes to look at their histories of ROIC, OM, FCFM). Naturally that means I miss many companies in the early super high-growth phase but I am happy to do so. Good luck to both our methods!

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Thanks Strelna and for sharing your additional investment criteria. I also use different criteria than here and the only stocks I own on Saul’s list are INFN (bought at $5), SWKS (bought before earnings) and ABMD.

Otherwise, I have other stocks not mentioned here.

Saul’s methodology is pretty sound IMO and I can see why he has generated a great deal of interest.

Despite all our nuanced investment concepts, nothing so affects these investments like future expectations which can overwhelm all other criteria is we get caught surprised at earnings announcements.

I agree with Saul that SWKS couldn’t have been more positive about future growth and expectations…I couldn’t see any caution in their words at all…unusual IMO.

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