In recent weeks, shares of Himax (HIMX) have weakened on news that its biggest shareholder (Innolux) intends to sell much (if not all) of its stake. A share divestiture of this magnitude tends to be a very negative short-term catalyst, as it skews the stock's supply/demand ratio.
Adding insult to injury, a recent teardown of Google (GOOG) Glass made no mention of HIMX. The microdisplay is clearly visible, but not easily identifiable to anyone who works outside of the LCOS industry. As Bones would say, "Damn it, Jim…I'm a stock analyst, not an engineer." Luckily, Karl Guttag was kind enough to comment to the topic. Guttag is one of the world's most notable microdisplay engineers. He was also the linchpin in our initial Seeking Alpha report that identified HIMX as a supplier to Glass.
"The teardown clearly shows an LCOS panel (most likely Himax). I haven't seen anyone finding an identifying mark to confirm Himax. The number on the glass is probably a quality control identifier (such as the position of the device on the wafer)."
In other words, HIMX wasn't mentioned in the teardown because there was no clear identification. However, as one of the top authorities on the subject, Karl continues to believe the microdisplay is indeed Himax's.
This runs counter to Thursday's market action, which saw shares of HIMX fall as much as 8%, as investors opted to shoot first and ask questions later. In contrast, InvenSense (INVN) rose more than 3% after being identified in the teardown.
These events are illustrative of why we changed our categorization of HIMX from "Great Find" to "Wait Time." Our categorization system meshes with the dynamics of risk and reward. Remember, conceptually, if a stock at $10 can go to $30, risk and reward become equal at $20. For a stock that is "poised to triple," that theoretical equilibrium point is reached once the stock doubles. Indeed, HIMX did double… and since that time it has been undulating up and down (mostly down of late).
The good news is that the Innolux news is getting priced in. Simultaneously, the Glass teardown has served as a false-negative on HIMX shares. Net-net, the balance of risk and reward may be reaching a level that once again favors investors.