How sector results apply to our stocks

Back in March of this year, somebody posted a table of how sectors of MF RB picks have performed in average return against the market, since the MF RB service began in 2004 (as of market close on Mar 2 of this year). Now my post isn’t about MF RB or their picks, but about sectors. And I don’t remember where I saw this (it was back in March as I said) but I copied part of it at the time, including the table. Remember that the results below are from 2004 to Mar 2nd of this year, but have not been brought up to date.

Results varied from 12 picks in Food and Beverage, beating the market by 128% on average, and 18 picks in Health Care Technology, beating it by 104%, down to 7 picks in Energy, trailing the market on average by 85% !

However, what I want to focus on is Communication Equipment (aka the Semiconductor Industry), including several stocks that we’ve talked about, including stocks such as Ambarella, NXPI, Infinera, and Skyworks. This sector has trailed the market by 60%! That’s a bunch! And not a single one of the 15 RB picks had beaten the market! Not one! Now this isn’t because of rotten picking (they were RB picks after all), but this reflects something about the sector!

Now I’d like to compare this with Internet Software and Services (which category is pretty self-explanatory). There have been 41 picks from this sector, and those 41 picks AVERAGED beating the market by 47%.

I hadn’t thought about this table since March, but I guess I must have been reacting subliminally to the same observations. The Semiconductor Industry is a tough playground, and when you compare trailing the market by 60% to beating the market by 47%, you can see why I have exited Ambarella and Infinera, passed on NXPI, and have been reducing my position gradually in Skyworks, while gradually building up positions in internet software stocks like Salesforce, Shopify, PayCom, PayPal, etc. Granted three of my biggest four positions are in homebuilding, shoes, and banking, but the fourth, Amazon, qualifies as internet services in both internet retail sales, and in its cloud services.

As I see it, the big differences between these sectors is that a chip provider makes a physical product which may become commoditized, and it has to wait each quarter for orders to come in, or not come in, from large customers who may consider them expendable, while an Internet software-as-a-service company has that money coming in quarter after quarter, predictably and almost guaranteed, and usually from hundreds of customers. A customer can’t practically say “Oh, another supplier is a little cheaper this quarter, I’ll switch my whole system to them.” A semiconductor company has to really excel to succeed, while an Internet services company has it considerably easier.

Hope you found this interesting.

Saul

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I found it extremely interesting.

The only point maybe worth making is that when a chipmaker comes through a screen of seriously good fundamentals and also has relative strength and momentum it is clearly worth taking notice. It would have been a pity not to have bothered with SWKS and AMBA! Some annualized return - providing you maintained the view the sector was high risk and had a mental trailing stop-loss (which could of course, given the gains, be quite wide).

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I think the concept of sector performance speaks to the benefit of buying/holding stocks in a rising market or a strong sector more than pointing out an inherent flaw with semiconductor companies. The semiconductor sector will one day in the future be strong again and outperforming other sectors (just as it did when SWKS was flying high a year or two ago). So at any given time just because one sector is outperforming or underperforming it likely has little to do with the underlying business model of the sector. Tides rise and fall, and with them the stocks therein.

Jeff

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A semiconductor company has to really excel to succeed, while an Internet services company has it considerably easier.

Perhaps the fate of Skyworks is that of other older chip makers like Liner Tech and Maxim, LLTC MXIM. Steady sales, fat margins & a slow transition to paying out a 3% dividend.

http://finance.yahoo.com/quote/LLTC/financials

Anyway I believe SWKS certainly deserves higher pricing, it’s just the markets perception of them fused to Apple’s hip. Not a bad problem IMO.

JT

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Some sectors (energy, semiconductors, automobiles) are cyclical while other are not. Cyclicals are much more difficult sectors to invest in. One of my current cyclical energy plays is Core Labs.

http://invest.kleinnet.com/bmw1/stats20/CLB.html

Denny Schlesinger

2 Likes

Results varied from 12 picks in Food and Beverage, beating the market by 128% on average, and 18 picks in Health Care Technology, beating it by 104%, down to 7 picks in Energy, trailing the market on average by 85% !

However, what I want to focus on is Communication Equipment (aka the Semiconductor Industry), including several stocks that we’ve talked about, including stocks such as Ambarella, NXPI, Infinera, and Skyworks. This sector has trailed the market by 60%! That’s a bunch! And not a single one of the 15 RB picks had beaten the market! Not one! Now this isn’t because of rotten picking (they were RB picks after all), but this reflects something about the sector!

The moral of this story, as I read it is… put all my stocks in Food and Beverage!! OK, with maybe some in Health Care Tech just to diversify my risk a tad.

:wink:

OK, confession: hopefully most of you realized that was tongue-in-cheek…but not completely. Think I’ll spend some time looking in those sectors one of these days for “Saul stock” candidates. :slight_smile:

Cheers,
Mj
Long on Food & Beverage in real life

Long on Food & Beverage in real life

Nice

Saul,

If you like software stocks may I recommend taking a look at TEAM (Atlassian). TEAM is a recent IPO but they have been around since the early 2000s.

The company produces a software suite used by many industry veterans to…wait for it…manage the creation of software. A trend of trends if you will.

The suite includes project management and collaboration tools that help teams organize their work and to work more efficiently. This is the software your HUBS, PAYC, SHOP, CRM and PYPL stocks use to manage their feature workload. Many Agile methodology software companies use software tools like Atlassian when they reach scale. They have to.

We use Atlassian at my workplace. Many of our clients do as well.

Hope you found this post useful and it gives you ideas for further research.

Best,
–Kevin
Long TEAM

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Atlassian – they have Jira, right? My company is researching the move from MS Project into a more Agile tool. Why Jira (or another Atlassian product) over their competitors?

[Slight topic shift, maybe, but still relevant…]

Hi Jeff,

If you are looking for an agile project tool your choices are (usually)

  1. Trello
  2. PivotalTracker
  3. Atlassian Jira
  4. VersionOne
  5. Rally (now part of CA)

Trello is no frills and very easy to use. I view it as an excellent tool for managing a small team or using it as a personal scrum board. I think it’s actually a perfect tool for those getting started in agile. However, being fairly simple it lacks a lot of the enterprise sophistication such as reporting metrics.

PivotalTracker is sort of your next step in the project tool evolution. Pivotal is also simple to use and has some nice features. However, creating tasks and assigning those tasks to stories aren’t possible in their system (if that’s how you’re doing agile). The formatting is also limited when entering acceptance criteria into your story (you pretty much get the equivalent of a line editor). You can attach documents and have nicer formatted descriptions there, but, managing external attachments outside the tool sort of defeats a goal of having a self-contained system (if that is your goal). And like tasks, you can’t attach defects to stories if the story has a problem. Instead you need to create a separate “card”, categorize it as a bug and track it independently. In their system you’re limited to defining stories, bugs or chores as card types.

While Pivotal had its problems, we actually used the tool for many years up until quite recently. We eventually got to a size and scale where adding new users became too costly to do in Pivotal, and so we opted for Jira. Plus, many of our enterprise clients use Jira - and this reason alone is why I feel the product will receive more mainstay in the software world: commonality of systems to user base entrenchment begets further entrenchment. Having a commonly-used tool across delivery teams just makes things easier to manage.

Jira is a robust platform. Full featured, highly configurable, great integrations and nice collaboration support (with HipChat and BitBucket for example). It’s also really good at reporting. We do a lot of work with Fortune 500 clients and many are shifting to an agile delivery model (no suprise there). I’d say a good 20-30% of them are now using Jira. Jira is platform agnostic (you can use it for Ruby, Java, .NET or any other development language), but, if you’re a .NET shop you do have one more choice and that choice is TFS. TFS is on par with Jira for the most part, but you should really should be fully in the Microsoft ecosystem if you want to get its full benefit.

I don’t have personal experience with Rally and my work experience with VersionOne was cursory so I won’t talk about those here. The products are also full featured and may be worth your time reviewing. They are also very expensive and can become difficult to use/configure. VersionOne in particular is an interesting choice. The product has been around since the early days of agile. All the agile purists will rave about it - because you really can do anything with the tool and configure it exactly to how you’re doing agile. But because of this flexibility it actually has a steep learning curve, and this makes the tool more cumbersome. That’s the price of being truly agile I suppose. My opinions of course.

Anyways I hope this information is helpful in your decision making process. Please don’t hesitate to shout out again if you should need further assistance. :slight_smile:

Best of luck!

–Kevin

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Saul,
If you like software stocks may I recommend taking a look at TEAM (Atlassian). TEAM is a recent IPO but they have been around since the early 2000s… Hope you found this post useful and it gives you ideas for further research.

Thanks Kevin, I’ll take a look.
Saul

If you like software stocks may I recommend taking a look at TEAM (Atlassian). TEAM is a recent IPO but they have been around since the early 2000s.

While it’s a very promising software suite, I see a couple of problems with it:

  1. seems quite expensive at a P/E of 600. Is it just a current anomaly e.g. because of a large investment or is the market expecting them to conquer the whole market and quadruple their margins?
  2. does not have a moat (IMHO), on one hand it stormed the field because the software it replaced did not have a moat on the other hand it can lose the field for the same reasons (I know teams that have migrated away from Jira without much trouble)

TEAM seems quite expensive at a P/E of 600.

Hi Stenlis, just curious, where you got that figure. They have current trailing earnings (not taking a forward guess here) of 33 cents. Their price is $27.50. That gives me a trailing PE of 83. Still high, but a different order of magnitude.

Saul

Hi Stenlis, just curious, where you got that figure.

Hello Saul,

I looked into their Q3 report:
https://s2.q4cdn.com/141359120/files/doc_financials/Q32016/Q…

They are reporting net income per share of $0.07 in Q3 and $0.05 for the last 3 months.

They report $0.33 as their target for the FY in the presentation though:

https://s2.q4cdn.com/141359120/files/doc_financials/Q32016/Q…

(I’m relatively new to reading these so I’m probably missing something here)

Kindly,

Stan

Never mind I found it in their Q3 report on the very last page. I was looking at non-adjusted figures before…

Thanks for the correction, these reports are sometimes hard to look through.

They are reporting net income per share of $0.07 in Q3 and $0.05 for the last 3 months…They report $0.33 as their target for the FY in the presentation though: I’m relatively new to reading these so I’m probably missing something here)

Hi Stan,

I looked on their Investor Relations web site and looked at their presentation associated with their last earnings report (as they are a new IPO, they only have two earnings reports on record, but they give Net Income back about six quarters in their graph). I divided past net incomes by the current number of shares (post IPO) to make results meaningful and comparable. I get this:


2014:   xx   xx   xx   07 
2015:   05   05   11   09 
2016:   08

Now, they have trailing earnings of 33 cents, and guide (under-estimating) to 5 cents for the quarter and 33 cents for the June fiscal year, which makes sense as they had 5 cents last year. I’d guess they’ll actually make 7 or 8 cents for the quarter.

Hope that helps.

Saul

The Semiconductor Industry is a tough playground … you can see why I have exited Ambarella and Infinera…

I wasn’t aware that INFN is a semiconductor play. As far as I’m aware, they’re optical data transmission equipment - that’s big boxes with repeaters and such.

Also, if we’re talking commoditization, what’s more a commodity than retail items like shoes? Heck, it’s easier to get a loan from a new bank than it is to switch chips in a phone.

Saul, you said:

However, what I want to focus on is Communication Equipment (aka the Semiconductor Industry), including several stocks that we’ve talked about, including stocks such as Ambarella, NXPI, Infinera, and Skyworks. This sector has trailed the market by 60%! That’s a bunch! And not a single one of the 15 RB picks had beaten the market! Not one!

Rule Breakers first picked AMBA on 09/25/2013. That pick, in fact, is up 200% and is beating the S & P by 164%. Check the RB Active Recommendations list to see it all in green.

Best, Swift…
Long AMBA (and way beating the S & P on it)
AMBA Ticker Guide

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Rule Breakers first picked AMBA on 09/25/2013. That pick, in fact, is up 200% and is beating the S & P by 164%.

Hi Swift, the only thing I can think of is that the guy doing that article (it was a MF article, by the way), was writing in March, when the price of AMBA was $36-$37 and not $57. Perhaps he averaged the two RB recommendations for AMBA (which were at $59.60 and $19.11 and got $39.35, and the price at the time ($37.00??) was below that. But I’m just guessing.
Saul

Hi Saul,

On March 15th 2016, the AMBA pick by Rule Breakers made on 9/25/13 was up 97%, the market 19% over the same period.

Since then, the stock price has continue to surge upward from $37 to about $56 today.

Best, Swift…
Long AMBA
AMBA TG