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Chip boom defies bearish predictions
By Cody Willard 12/16/2005
The semiconductor business is booming, and the explanation can be boiled down to this: There's more demand than supply for most chips, and there won't be enough capacity to meet that demand anytime soon.
So the question for traders and investors is what to do with these stocks. We can't just take a snapshot of the booming fundamentals and decide to jump into any semiconductor stock headfirst, after all. We need to look at, among other things, valuations, end markets and sentiment (and even technicals, if that's your thing).
Before I detail some of the individual stocks I am currently trading, I'm going to spell out a little more of my approach, and the reasons beneath my approach, to the semis. I received hundreds of e-mails from readers in response to my request for subjects recently, and this type of process explanation was right at the top of the list.
I run a tech-centric fund, so I'm more compelled than most to have a position in semiconductor stocks.
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On the long side, I prefer to stick with individual names so that I can get more volatility and leverage through calls and common stock than I can get in, say, the Semiconductor HOLDRs (SMH, news, msgs). To be sure, volatility and leverage also bring more risk, but that is the nature of my approach.
I always prefer to use a "bottom up" approach of analyzing individual companies to arrive at my investment conclusions. That's opposed to a "top down" approach, whereby you look at the macroeconomic picture and other broad indicators to determine what stocks to trade and invest in.
On the short side, I do use ETFs more often, at least in a bull market like the one we've been in since I launched my fund three years ago.
Not as aggressive
Right now I'm bullish and long some semis, but not as aggressively as I have been at other times this year. I find the valuations of most semi stocks to be compelling still, but not nearly as cheap as they were in October when Intel was at $22 and I was buying calls and common.Semiconductors:
BULLISH | The fundamentals in this sector heavily favor the bulls.
However, sentiment has turned around, reducing the risk/reward that had been so favorable.
Willard's holding stocks in the sector here, rather than going aggressively longer.
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The SMH itself has rallied more than 20% since then, too. Likewise, I really liked the valuations and was aggressive in loading up on semis last April, before the SMH had rallied more than 30% from those levels. Intel (INTC, news, msgs), though, still only trades at less than 15 times next year's earnings, ex-cash. That one, like most others, is still quite cheap, just not quite as cheap as it was.
The change in sentiment from those levels when I was more aggressive is pronounced. When anything makes a move this strong in this short a time, you know that sentiment has clearly shifted back to the semi bulls, and that makes the sentiment risk/reward on the semis just OK.
I've trimmed or sold all of my common-stock positions in most of my semi names during the last couple of weeks, but I'm still net long (via calls and/or a little common) most of the names I've mentioned on the Street.com site in recent months, including Broadcom (BRCM, news, msgs), Intel and PortalPlayer (PLAY, news, msgs).
The stocks have come back a lot since the bloody days of 2005 that I cited above, partly because it has become obvious to everyone but the staunchest bear-cult members that business is booming.
But I preferred buying these stocks when nobody believed in them, so I'm mostly a holder of semis now rather than a buyer. I believe the risk/reward lies, by far, most favorably with the bulls. But I just don't think the near-term upside in most of my semi longs is quite as exciting as it has been. I'll detail my analysis in some specific names soon.
By Cody Willard, RealMoney.com Contributor
At the time of publication, the firm in which Willard is a partner was long Broadcom, Intel and PortalPlayer, and short SMH, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person.
© 2006 TheStreet.com, All Rights Reserved.
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