Some SWKS conf call highlights

I listen to the SWKS conference call. Wow, everything seems to be going in this company’s direction. Here are some highlights (from memory so excuse me if I missed anything):

  • Guidance for Q2 is $750M in revenue and $1.12. There is reduced seasonality relative to past years due to diversification of their markets from mobile which has higher seasonality. The said that in future years that the drop from Q1 to Q2 should also continue to be reduced as they expect it will this year.

  • They seem China as big this year as many carriers move from 2G and 3G to LTE. I think they said that there will be something like 90 million to 250 million LTE handsets sold in China in 2015. China will continue to be strong and other emerging market countries like India will follow so they see huge numbers of their products being needed.

  • They are an integrated provide that includes design and many/most/all of the components needed to control signal receiving and sending. Competitors without a solution to handle design, integration, etc (i.e. they sell components piecemeal) are having an increasingly hard time competing because customer are increasing prefering companies like SWKS that can handle their entire solution. This is enabling SWKS to gain market share and keep margins higher. Also, as chip sets is more complex (LTE is more complex than 3G and 3 G is more complex that 2G) the number of components needed to filter out unwanted signals increases and becomes more complex. There was a recent SA article that went into this.

  • SWKS is involved early in the design so they have very good visibility into what their customers want and where the industry is going. This seemed like a hint that the rest of FY 2015 is going to be great (they don’t give guidance by one quarter out). They expect to earn $7 per share in the future…they didn’t give a time frame but I think they could achieve that in FY 2016.

  • Dividend is currently 13 cents per share per quarter. Management said they expect to raise it AT LEAST once per year.

  • Company is also buying back shares.

  • I think they’re on track to hit $5 adjusted EPS in FY 2015 (quarter ending 9/30/2015). This would put the forward P/E at 16. I think they deserve a P/E of at least 25 so I would expect the stock to be worth $125 by November. Whether the stock actually goes there may be another matter.

  • Management said that SWKS has one or more components in virtually all mobile phone manufacturers.

  • They see the IoT being big.

  • $1B in cash and no debt.

In summary, I got the strong impression that everything is going great and that this company is poised for lots of success going forward. This conference call is definitely worth listen to.

Chris

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Hi Chris,

Thanks for the highlights. Looks like Skyworks is making very very good progress.

May be, I should reduce my SWIR exposure and add some Skyworks. I could also sell some of my least conviction stocks (CLNE, GTLS) and add Skyworks. Your writeup suggests that Skyworks is at least fairly priced and potentially undervalued.

The thing I like about this company is the diversification of its income stream. They sell so many different chips, have tons of customers, and should generally keep riding the cellular upgrade cycle (3G to 4G, 4G to LTE, LTE to 5/6G …).

Anirban

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May be, I should reduce my SWIR exposure and add some Skyworks. I could also sell some of my least conviction stocks (CLNE, GTLS) and add Skyworks. Your writeup suggests that Skyworks is at least fairly priced and potentially undervalued.

Yes, I think SWKS is currently at least 20% undervalued. If they hit $5 eps in FY2015 then they will be 40% undervalued based on an $80 share price (also my opinion). I looked at SWIR and I just couldn’t justify the valuation.

Regarding your portfolio, I like how you pay attention to diversification across different sectors. I do that too and I try to keep any one sector below 25% of my portfolio. Looks like your sectors are well diversified.

I think you have more stocks than you need to maintain good diversification. You could easily cut you number of holdings in half without losing diversification. I find 2 negatives to having more stocks. First, it’s more work. Second, I find that allowing myself to keep more stocks reduces my discipline in cutting companies that I am lukewarm about.

I got the sense that you are keeping some holdings even though you think you should probably sell them. I used to have a harder time letting go of a stock when it might do well or recover. I try to remember that it’s ok to miss upside, especially if I’m current down on a stock. If I think it will underperform relative to other opportunities I try to be disciplined and sell.

Chris

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I think you have more stocks than you need to maintain good diversification. You could easily cut you number of holdings in half without losing diversification. I find 2 negatives to having more stocks. First, it’s more work. Second, I find that allowing myself to keep more stocks reduces my discipline in cutting companies that I am lukewarm about.

I got the sense that you are keeping some holdings even though you think you should probably sell them. I used to have a harder time letting go of a stock when it might do well or recover. I try to remember that it’s ok to miss upside, especially if I’m current down on a stock. If I think it will underperform relative to other opportunities I try to be disciplined and sell.

I agree, I have at least 15 to 20 stocks more than I should have. Right now, I 'm not just lukewarm but pretty cold on CLNE and GTLS. These are prime candidates for cutting.

I am also becoming more and more sour on TCS. The concept is good, there’s opportunity for expansion, but their lack of focus on shareholder returns is disconcerting. This one of those where the purchase was based on the “story” not on any further analysis. I do, however, think that they are fairly priced now for their business prospects. I 'm inclined to consider one more quarter before making a decision to cut it.

I am also quite displeased with INVN following their debacle last quarter, and I suspect the RB/wearable hype around it is clouding my thinking. Following the previous quarter’s conference call, I had decided to give it one or two more quarters to demonstrate that it’s not stuck in a commodity marketplace with zero moat. That line of analysis & thinking has me holding it.

FIVE can also be a sell candidate. I 'm not 100% sold on the idea but I think the idea does have merit. It’s an interesting concept - selling products at or below $5. They have shown decent sales growth. Their same store sales figures have been reasonably strong. Those are the good points. The negative include the fickleness of retail (the concept could loose steam with the young adults they have been targeting), and valuation is still somewhat rich but probably okay on a PEG basis at current prices. This one I might watch for some more quarters.

Finally, there’s MTH, which is not really a long holding for me. I bought it for running covered calls. It’s been a good one for writing covered calls since the stock has essentially been range bound. Someday, it will get called out through the call.

Thanks Chris for making me think some more. The above post turned out to be me thinking out loud. If I sell CLNE, GTLS, and some SWIR, I could easily add a decent amount of Skyworks.

Anirban

Jan 17, BCS at 70/80 selling for $5.

I have a 60/65 Jan 17 BCS that I got into last Oct along with stock position. For high conviction high growth, BCS can be a good method to limit capital at risk.

Another idea:
ATM leap puts are selling at 20% net gain for 2 years. If stock zooms, a big portion of this premium might be recovered in < 1 year giving high ARR. If not, then one limits their exposure to current price by $20.

Anurag

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<i?Jan 17, BCS at 70/80 selling for $5.

I have a 60/65 Jan 17 BCS that I got into last Oct along with stock position. For high conviction high growth, BCS can be a good method to limit capital at risk.

Another idea:
ATM leap puts are selling at 20% net gain for 2 years. If stock zooms, a big portion of this premium might be recovered in < 1 year giving high ARR. If not, then one limits their exposure to current price by $20.

I sold the May15 $85 puts today for $9.10 when the stock was around $81. I may look at shorting deep in the money puts as a substitute for buying shares.

Chris

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I sold the May15 $85 puts today for $9.10 when the stock was around $81. I may look at shorting deep in the money puts as a substitute for buying shares.

You may want to be careful with short term puts on growth stocks unless you are ok owning ~$8K worth of shares in the short run. That is why leap OTM options (call, puts or certain spreads) are a better action in general for such stocks.

Anurag

Anurag,

You may want to be careful with short term puts on growth stocks unless you are ok owning ~$8K worth of shares in the short run. That is why leap OTM options (call, puts or certain spreads) are a better action in general for such stocks.

I am ok owning the shares and I would likely sell covered calls if the shares are assigned. The premium gives me a price below &76 if assigned but I suspect that the puts will expire worthless in about 4 months. The 70/80 Jan 17 BCS is about 2 years out which is a long time to tie up my $5. I do believe SWKS to be undervalue with substantial upside otherwise I would not be selling the puts.

I have lost more money than I have made buying calls, and I have made lots of money selling deep in the money puts. Often they expire worthless after I’ve collected juicy premiums. Other times the shares get assigned but then I have the luxury of time whereas owning calls can often result in a 100% loss if the strike is not exceeded.

Chris

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+1 for Chris.

The risk reward tradeoff for calls only makes sense when there’s a very good handle on valuation and a clear catalyst in the 1-2 year time horizon. I limit my use of calls to special situations. DITM written puts are good especially when you are ready to buy the shares.

Anirban

I just read the transcript of the CC and from a few of the questions got a hint that the modest market reaction to the treat earnings report may have been the perception that it was a seasonal blip. Which actually may not be the case. It certainly was one of the most upbeat CC I have heard in a while.

Streaming is certainly going to grow. I just looked at some language learning apps and see that the old expensive CD based programs (ones that would usually need repurchase when your PC died or you went to a new OS) have been replaced with far cheaper apps.

This is a great time to be a self learner, self educated or expand your present skill base. And it can be done so cheaply via a mobile device and a wifi.

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I do believe SWKS to be undervalue with substantial upside otherwise I would not be selling the puts.

If this conviction is true then OTM leap calls are solid way to go about it. Otherwise, either no basis of such high conviction or pointless to have that knowledge right and not use it to the fullest.

I now have a history of more than a dozen leap calls over the last 2 years with > 90% success. Another dozen or so of BCS with > 90% success - most of these BCS came from MFO.

The trick is simple - I check my convictions carefully. I then chose the right investing tool.

As per what I learnt from MFO:
Selling puts on a high conviction growth stock is a bad process in general - opportunity cost. But the stock or call or BCS or synthetic long. Maximum exploitation of time is achieved with OTM options in many cases. Leap puts and leap calls do very well if one’s convictions turn right.

Now there is one advantage of following the correct process. Just like when one take golfing lessons for the first time after having played the sport many times, the technique correction invariably leads to lower scores for the short term but over time, it leads to much better results, similarly in investing, the correct process leads to bigger rewards later. In this case, losing out to a string of deep OTM leap calls will provide a solid lesson on tempering the convictions going forward or teach a thing or two about valuation. It happened with me on leap calls on WPRT. I lost over there fair and square and that was the only loss I had on this technique. Last year, I purchased deep OTM calls on CLNE and WPRT fully knowing that both could expire worthless but the idea is simple. I wanted to add to my stock since I believe at least one of them should recover. Buying deep OTM leaps, enabled me to limit my capital by 2/3. So even if I lose, it would be a small capital after tax loss but the gains will by asymmetrically high. The process is to keep doing this with a large number of stocks that fall into this category. Even if I succeed (10 bagger) 10% of the time, I should do very well. I will report the results on this section of my experiment in a few years. Probabilistically it makes sense. It can be gut churning to see 90% of the bets go wrong. I will be trying to improve the probability by studying business carefully and not randomly throw darts. I will give credit to Taleb for teaching me this philosophy through his books. It is currently not practiced anywhere in Fooldom.

Bottom line, I choose the right tool for the job or the right investing mechanism for the convictions.

Anurag

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Anurag,
I have experience with DITM calls but none with OTM calls. How do you choose your strikes or how far OTM are you typically buying?

Thanks,
AJ

How do you choose your strikes or how far OTM are you typically buying?

This is something new that I am trying so my input should be taken with a grain of salt as it stands to get refines considerably. For the past few years it is has been < 10% OTM and always leaps. For CLNE and WPRT I did 40% OTM late last year. I often limited the Call capital outlay further by making it into a spread (BCS) or rarely diagonal (short term call sell for 10-20% OTM). I often post my trades on SA options board.

Anurag