Thoughts on SWKS and a different kind of investi

Investment Analysis Clubs Saul’s Investing Discussions
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I just read an interesting post on another MF board discussing Skyworks, and this post illustrated a completely different model of investing than the one we use here. It made me realize how lucky we are on this board where we discuss and learn about stocks instead of just buying a percentage allocation as recommended by a service, without necessarily learning about the stock at all. This was written by someone who is apparently already invested in the stock at the service’s recommendation, and is even writing puts on the stock, but doesn’t know anything about the business.

The service wrote their take on the last earnings, and it was very well thought out and well written by the way. It pointed out, as we already know from what the company said on the conference call, from the company’s investor’s presentation, and from our discussions, that even higher margins are not only possible but quite likely, due to increasing complexity which is driving out competitors. The poster wrote: That’s encouraging to hear… implying that he was unaware that the company was forecasting higher margins, or why.

The service’s take noted that SWKS sells to all smartphone makers, but that Apple is a key customer. The poster wrote in response Aha…so it sounds like the big risk is customer concentration. Sounds like AAPL is a major customer of theirs. Any idea what % of revenue AAPL accounts for? Do they also have chips in Android phones?..I would be concerned if they only sell chips into iPhones…I think I still don’t fully get the biz model here…so half the business deals with chips in smartphones, e.g. iPhone, and half the business deals with chips in connected smart devices, aka Internet of Things…am I right there?

I feel like a bit of an investing snob, I guess I must be a bit of an investing snob, but this investor sounds like he or she doesn’t know the most elemental, basic things about the company. It’s hard to imagine one of us buying a 4.5% position in a stock without knowing anything about the company. Yet this poster has invested in Skyworks, and is writing options on it, as he made clear, simply on the service’s recommendation:

Glad to know at least I’m not the only one writing puts :slight_smile: The ‘yield’ on them and the underlying valuation seems equally rich… …Those numbers tell me that the price could be a bit rich, especially if this is a very cyclical company, which I think it is…correct me if I’m wrong…it definitely doesn’t look cheap to me at least

I understand that this is a service where you are told “We are buying stock ABC. We recommend you purchase ABC for X percent of your portfolio,” and that this works very well for some people, and that that is what they are paying for. (The post I’m referring to actually got a number of recs from other people). However this is such a different model, and it seems so entirely foreign to me, that it just jumps out at me when I encounter a post like this.

I also know the service often makes excellent picks, and that I would never have learned about SWKS if I hadn’t picked it up there, but I feel we are so fortunate to have the kind of intensive discussion of stocks and investing that we have here. I for one prefer to invest knowing about the company, what it does, and what its business is! I want to thank all of you for all that you contribute to this board. I’m indebted to all of you for helping me to understand what goes on with our companies! There have been so many really special and personal contributions on this board that it’s positively amazing. I’m thinking of simple things like oologah’s reminiscences of what a drone would mean on a farm in helping to evaluate AMBA’s potential, and Karen’s ferreting out that AMBA chips are in the Lily drone, as well as the many sophisticated company write-ups that members have contributed here, that are often at least as informative of those of any paid service. Thank you all again. You are a great bunch of people and I feel very lucky to have you contributing to my board.

Saul

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One of the things I like about the discussions is that I think it gives some insight into how others are thinking about SWKS. Saul, you’ve proposed price anchoring for the reason the stock looks cheap. And that may be part of it, but clearly a lot of people are just tossing SWKS into the “chip company” bucket and applying a whole host of assumptions. We saw that in action during the 10% dip a few months back, when SWKS dropped with all the other chip companies even though its outlook was so radically different at the time. More than anything, I think it’s that difference of opinion that is creating the current opportunity.

I think you see further evidence of this view in the major analyst opinions. Back in early September, someone posted S&P’s rating on the Pro board:

S&P CAPITAL IQ BEGINS STARS COVERAGE ON SHARES OF SKYWORKS (SWKS 55) WITH HOLD OPINION: We initiate analytical coverage on shares of this semiconductor provider with a Hold opinion. We set operating EPS estimates at $3.13 for FY 14 (Sep.), $3.91 for FY 15 and $4.22 for FY 16. Our 12-month target of $61 is based on a P/E of 15.7X our FY 15 estimate, near peers. We see tailwinds including the adoption of 3G/4G technologies, led by China, and significantly greater revenue potential per device, in our view. We see the medical, automotive, military and industrial markets being positive contributors. We think SWKS will focus on opportunistic acquisitions to diversify.

So in other words, S&P saw a company with huge tailwinds and huge opportunity, but they gave a 12-month price target of $61 based on a P/E of 15.7 “near peers.” And I think “near peers” is the magical phrase that explains so much of the market’s current outlook on the company.

We may be wrong about the business, of course, and the folks treating SWKS just like every other chip company may be right (and it certainly seems like the stock price will be influenced over at least short periods by those folks, as we saw in the 10% dip). But I would like to think that those of us who have taken the time to really get to understand this company’s differentiators have a long-term advantage over the folks applying blanket industry assumptions to the company. We’ll just have to see :slight_smile:

Neil
Long SWKS

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but clearly a lot of people are just tossing SWKS into the “chip company” bucket and applying a whole host of assumptions

Thanks Neil for that great observation! That is clearly true. People who don’t know SWKS just say “another commodity product”, which couldn’t be further from the truth.
Saul

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I suspect that many large institutions buy stocks based on sector selection. IOW if they think railroads are going to do well because freight traffic is increasing, they will buy a basket of railroad stocks, Because when a sector is hot, almost all the stocks in the go up. In order of importance it is first general market, then sector, then individual stock.

Because of size and investor expectations (I bought your fund to invest in stocks why are you 60% cash)it is hard for them to invest based on the general market. If sector is more important than individual stocks that is where they should focus. Also even if they find an individual stock it is hard to buy without running up the price.

I own stock in a company called Arcam,. part of the 3D Printing group, a sector which is not doing well at the moment. Actually Arcam has nothing to do with other publicly traded 3DP stocks and the company is doing fine. But the stock (US ADR AMAVF)is going nowhere. Possibly SWKS is in the same situation

I like your I think “near peers” is the magical phrase that explains so much of the market’s current outlook on the company. Because that means defining “near peers” which is mostly subjective.

To buy either one has to assume that long run the markets are at least semi efficient and that the stock price will eventually reflect the company potential. I am more sure about Arcam because the technology is so good, and is almost sure to get better. With Skyworks , users will always try to multi source and dive down margins.

I own both

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Neil,

Thanks for your insights. Just wondering who are these ‘near peers.’ Are we talking about QRVO, QCOMM, for instance? I’m not trying to time the market, but very interested in observing the trend of 'near peers’a and see if they are indeed proxy of SWKS price movement.

Hex

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I think the problem is that the very term originates in wanting to create a group in the belief that the group will move as a whole to some extent. When the products are true commodities, that probably works pretty well … or at least one would expect it to, but if one of the companies has some particular advantage, then the conditions moving the group might give that company a special advantage and cause them to move differently from the group.

The less coherent the group, the more dubious the exercise becomes. Here, I think the sense is that there is enough about SWKS that is special, then it shouldn’t really be behaving like it was a member of a group. The problem is, it gets classified as part of a group anyway and then you have its stock prices oscillating with the group’s perception, even though it should be separate. Like Arcam.

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I don’t know how S&P defines near peers, but when I google for semiconductor ETF and click on an iShares one (ticker SOXX), here is what they’re holding:


**Ticker**  **Name**                                **Weight (%)**  **Class**   **Industry**

INTC	INTEL CORPORATION CORP	              7.9825	Equity	Information Technology	37,892,223.18
QCOM	QUALCOMM INC	                      7.8295	Equity	Information Technology	37,165,803.00
TXN	TEXAS INSTRUMENTS INCORPORATED	      7.6128	Equity	Information Technology	36,137,189.05
AVGO	AVAGO TECHNOLOGIES LTD	              6.7067	Equity	Information Technology	31,836,044.24
MU	MICRON TECHNOLOGY INC	              5.9255	Equity	Information Technology	28,127,950.44
NXPI	NXP SEMICONDUCTORS NV	              4.8676	Equity	Information Technology	23,106,096.84
ADI	ANALOG DEVICES INC	              4.3593	Equity	Information Technology	20,693,189.40
SWKS	SKYWORKS SOLUTIONS INC	              4.3350	Equity	Information Technology	20,577,888.40
BRCM	BROADCOM CORP CLASS A	              4.1987	Equity	Information Technology	19,930,813.56
TSM	TAIWAN SEMICONDUCTOR MANUFACTURING    4.0054	Equity	Information Technology	19,013,486.02
SNDK	SANDISK CORP	                      3.2925	Equity	Information Technology	15,629,023.00
AMAT	APPLIED MATERIAL INC	              3.1912	Equity	Information Technology	15,148,155.42
ALTR	ALTERA CORP	                      3.0758	Equity	Information Technology	14,600,322.24
FSL	FREESCALE SEMICONDUCTOR LTD	      2.9285	Equity	Information Technology	13,901,503.84
LRCX	LAM RESEARCH CORP	              2.8758	Equity	Information Technology	13,651,092.17
XLNX	XILINX INC	                      2.7134	Equity	Information Technology	12,880,097.12
NVDA	NVIDIA CORP	                      2.6696	Equity	Information Technology	12,672,127.35
LLTC	LINEAR TECHNOLOGY CORP	              2.5995	Equity	Information Technology	12,339,569.41
MCHP	MICROCHIP TECHNOLOGY INC	      2.3167	Equity	Information Technology	10,997,209.10
KLAC	KLA TENCOR CORP	                      2.2272	Equity	Information Technology	10,572,312.25
MXIM	MAXIM INTEGRATED PRODUCTS INC	      2.2256	Equity	Information Technology	10,564,910.48
ASML	ASML HOLDING ADR NV	              2.1038	Equity	Information Technology	9,986,700.96
SUNE	SUNEDISON INC.	                      1.7941	Equity	Information Technology	8,516,208.40
MRVL	MARVELL TECHNOLOGY GROUP LTD	      1.6790	Equity	Information Technology	7,970,099.52
ARMH	ARM HOLDINGS PLC ADS	              1.5515	Equity	Information Technology	7,364,946.80
ON	ON SEMICONDUCTOR CORP	              1.2378	Equity	Information Technology	5,875,660.80

And, indeed, if you look at the YTD chart on Yahoo Finance of SOXX versus SWKS, you can see that they do tend to move together, but SWKS has had much larger moves upwards, resulting in much better performance:

http://yhoo.it/1cIL2Zx

Neil

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And, of course, one of the interesting things about basing it on a cap weighted index is how heavily it is dominated by the top companies in the index. Just for fun, I picked 6 companies that I have some interest or connection too out of the set and put them up for comparison.

http://stockcharts.com/freecharts/perf.php?SOXX,SWKS,ARMH,QC…

This is the 5 year version, but if you put in different baselines, you get some very different patterns. (Stockcharts.com is based on trading days, so 251 = 1 year, 1255 = 5 year, 2510 = 10 year. They also compensate on this chart for splits and dividends, so it is true yield.)

Sandisk in particular jumps around based on the time base. Skyworks looks phenomenally good in this context.

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And, indeed, if you look at the YTD chart on Yahoo Finance of SOXX versus SWKS, you can see that they do tend to move together, but SWKS has had much larger moves upwards, resulting in much better performance

Hi Neil, I looked at the comparison graph of the SOXX versus SWKS over the past year that you linked to. It showed the SOXX up 21.3% on the year, and SWKS up 137.3%. Now “tend to move together” doesn’t seem to accurately describe the difference between a 21% gain and a 137% gain.

Best

Saul

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If one looks at a shorter term, e.g., 100 days
http://stockcharts.com/freecharts/perf.php?SOXX,SWKS,ARMH,QC…

Then one can see periods of similar movement like around 20 March, but longer term they diverge significantly.

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I meant that when SOXX moves up, SWKS moves up, and when SOXX moves down SWKS moves down. The magnitudes of the moves are different – and it’s obviously not exactly 1 to 1 – but there’s a definite correlation in the direction of the moves on a short-term basis.

Instead of looking at the 1Y view, switch instead to the 3M view and then scroll back through the full year (click, hold, and drag the chart to the right). That’ll get you that same 1 year of data, but zoomed in. I think you’ll see the correlation in directional movement on a short-term basis.

To me, that indicates that some people are lumping SWKS in with the rest of the chip companies and trading them as a group. And that means that when chip companies are down as a group (like that 10% dip earlier), it may present opportunity on a longer-term basis.

Anyway, just some random weekend thoughts :wink: I’m not trying to really make much of it, just found it interesting.

Neil

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I understand that this is a service where you are told “We are buying stock ABC. We recommend you purchase ABC for X percent of your portfolio,” and that this works very well for some people, and that that is what they are paying for…

I want to say that what bothers me about this kind of investing is that the investors have someone knowledgeable guiding them, but they don’t learn how to figure it out for themselves. To use the old parable, it’s the difference between giving them a fish or teaching them how to fish. If the service says “We are buying stock ABC. We recommend you purchase ABC for X percent of your portfolio”, and you do so, you may do well with your stock purchase, however you don’t evaluate the investment, you are totally dependent on the service, and you never learn how to fish for yourself.

Just my opinion.

Saul

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Anyway, just some random weekend thoughts :wink: I’m not trying to really make much of it, just found it interesting.

Neil, the thoughts you post are ALWAYS interesting!
Thanks,
Saul

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Saul,
I too am deeply grateful for the many very intelligent posts on this board, yours in particular have been of tremendous benefit. I’ve learned a lot here and I continue to gain insights and knowledge . . . and a lot of it is not just informative with regard to investing, there just a lot of very interesting and thoughtful posts here.

As for trading with no (or little) knowledge of the companies in which the money is being invested, it would not surprise me at all if this accounted for the vast majority of transactions.

Technical traders do not find the business represented by a ticker to be of much interest. It is the chart of the stock (and sundry arcane statistics and derivatives) that hold their attention. Then there are the programmed trades fired of by computer algorithms. No human thought goes into the selection of a particular company’s stock, it’s all based on mostly the same stuff that technical traders use (I assume), only the process is automated so that the transactions can be placed on split-second changes and emergent information. And of course, there’s the “flash boys” who also have no concern for business activity, only in manipulation of the stock price.

And of course there’s an army of individual “investors” who, as you noted, simply react to the latest newsletter recommendation, or Cramer’s buy/sell declarations, or astrology or who knows what; anything other than personal time, energy and thought given to analyzing a businesses operations and financial performance.

Investors who follow the path represented by the majority of the folks who gather here are probably very much in the minority. I don’t remember when, but I remember at one time you posted that anyone can beat any index. At the time, as someone who just left the guidance provided by an Edward Jones adviser in favor of self managing my portfolio with the help of a TMF Supernova subscription I thought that to be a bold and suspect comment. David Gardner’s reputation is based on the extent to which he has out-performed the S&P which is intended to indicate superior skill at picking investments. You asserted that this is not really such a special skill and just about anyone was capable of doing it - maybe not as well as David, but besting the index in and of itself should not be regarded as a great achievement.

And it’s free for the taking, one only need read, understand and put into practice. And if there’s something that one does not understand, simply ask for an explanation - I, for one, have never been disappointed.

Saul, you’ve created something quite extraordinary here.

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Investors who follow the path represented by the majority of the folks who gather here are probably very much in the minority.

Frankly, while there are a lot of very insightful and knowledgeable people on the TMF boards, there are a lot of other people too. They scare me periodically by statements that indicate rash movements with little understanding. And, of course, it lies behind a fair amount of whining of people who followed some service’s best buy recommendation with no understanding or investigation of their own and then are sour that they were losing money instead of earning it. This is just not understanding what investing is all about.

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I want to say that what bothers me about this kind of investing is that the investors have someone knowledgeable guiding them, but they don’t learn how to figure it out for themselves. To use the old parable, it’s the difference between giving them a fish or teaching them how to fish. If the service says “We are buying stock ABC. We recommend you purchase ABC for X percent of your portfolio”, and you do so, you may do well with your stock purchase, however you don’t evaluate the investment, you are totally dependent on the service, and you never learn how to fish for yourself.

I would never argue at all with anyone who wants to learn to fish!

But I also am a bit troubled that we seem to be criticizing people who do not want to learn to fish, partly because that mostly describes me.

Although I spend a bit of time reading this board, and maybe someday will try harder to manage my own investments, I just invest in index funds right now; I do not manage my own investments. Similarly, I do not grow my own wheat, make or fix my own car, raise my own livestock, build or repair my own house, or make my own clothes.

Am I some kind of loser or slacker because I turn investing – and many other things – over to experts, or simply adopt uninvolved, passive approaches?

Well, you decide – instead of spending time on this, I spend almost all of my time, and almost all of my fairly meager wealth, working with inner city children, trying to help them learn to read, do math, develop safe and healthy habits, and learn to deal with the huge pressures resulting from their circumstances – circumstances over which they never had the slightest bit of control.

I do not think I am in any way better than you guys because I do this stuff and possibly you do not, but I also do not think you are somehow better than I because you manage your own investments and I do not. Things are not as simple, or as absolute, as some people here seem to think.

Saul, it is Ok to be different; it would be a boring (and frankly unproductive) world if everyone did exactly what you do. We need people like you, but we also need farmers and dock workers and teachers – we need people who spend their time passionately doing other things than investing, even if it means they do not match your model for appropriate investing behavior.

JMO

LTC

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LTC,

What a great post! You are absolutely right. There are people with the interest and dedication that it takes to invest the way Saul does. There are also people with a personality type that’s not suited to managing investments. And I dare say there are also some people without the math skills do this. There is nothing wrong with this. But trusting someone else to manage your investments can be risky for two reasons. First, they must be honest and trustworthy or you might get swindled. Second, they must be competent or your investments might lose value when they needn’t lose value. One problem with the latter is if you don’t know enough to properly assess someone else’s skill then you are taking a big risk in choosing who will manage the hard earned money that may have taken decades of work to accumulate. To safeguard against this it would be best to learn as much as you can so you can at least determine whether or not someone is skilled or not.

Chris

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“Give a man a fish,”
The wise man said, “And he eats
For a single night.”

“Teach him to fish, though,
And he eats for a lifetime!”
The wise man rested.

‘Twas a metaphor,
We think, but we had to ask,
“Sir, do you eat fish?”

“Of course, young ladies,”
He replied, “And so should you!
Good for heart and brain!”

“And sir, we must ask:
Do you catch the fish you eat?”
He had no reply. . . .

: )

Captain Haiku
Martha and Victoria

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Nothing wrong with deciding that index funds are good enough … and smarter than thinking that you can pay no attention, pick individual stocks, and do as well … or, come to that, pick a mutual fund and predictably do as well. And, nothing wrong with lurking on this board because it is interesting and might provide education that will be useful later. The problem is people who think they are investors and yet clearly don’t know anything about investing because they do no due diligence of their own and expect certainty in a universe which is anything but certain.

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I don’t remember when, but I remember at one time you posted that anyone can beat any index. At the time, as someone who just left the guidance provided by an Edward Jones adviser in favor of self managing my portfolio with the help of a TMF Supernova subscription I thought that to be a bold and suspect comment.

This paper from Harvard mentions that earlier studies found that the top quartile of individual investors consistently outperforms the market. In their own research, this group found that “it appears that the persistence in the performance of individuals comes primarily from stock selection rather than market timing… This persistence is robust to various risk adjustments and to return measurement horizon.”

http://www.researchgate.net/profile/David_Hirshleifer/public… (PDF)

My hunch is that the market-beating portion would be even larger if there weren’t some selection bias at work. Since all we ever hear is how impossible it is to beat the market, how poorly individual investors tend to do, and that even if you’re doing well now your results will likely revert to the mean in the future, I would guess that many level-headed, rational folks – the very kind that would probably do well investing on their own – decide the prudent thing is to turn their money over to professionals. I’m guessing that leads to an under-representation of those folks in the population of individual investors and an over-representation of people more inclined towards gambling and looking for a quick buck.

Personally, I’ve made more investing mistakes than I can count. If there’s a mistake to make, I’ve probably made it – multiple times! I’m slow that way. But despite all that, I’ve still beat the market handily since I started investing on my own a dozen or so years ago, so it honestly can’t be that hard. Hard would imply that one needs expert skill and excellent execution to achieve it, but I’m just learning like everyone else (and have no financial background) and my execution has been riddled with mistakes. It turns out you can make a lot of mistakes and still beat the market. Nobody should feel like it’s out of reach.

Saul, you’ve created something quite extraordinary here.

Hear, hear! I’ve learned (and continue to learn) a tremendous amount since this board was started, and am very grateful to Saul and everyone else in this community.

Neil

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