The semiconductor NAND / DRAM space had a pretty robust 2013, even Intel (INTC), which was probably one of the laggards of the group, was up just 25% in calendar 2013. Our three main holdings in the sector are Intel, Sandisk (SNDK), and Micron (MU), with a smidge of Kulicke & Soffa (KLIC) thrown into a few accounts.
Here is our brief take on the sector and what we are expecting in 2014 and how we are positioning our relative weightings in the above stocks for Q4 '13 earnings reports:
Sandisk: up 62% in calendar 2013, and our biggest semiconductor weighting starting from mid-2012 forward, SNDK has benefited from both a weak yen, and strong megabit pricing driven by a dearth of supply from NAND manufacturers like Samsung (OTC:SSNLF), etc. (Never owned Samsung). SNDK became an Apple (AAPL) supplier after Q1 '12, which definitely helped drive the stock from its 2012 low under $35 in May - June '12 to today's high $60 price level.
Personally, I think the tailwinds are beginning to fade somewhat although EPS and revenue estimates continues to tick higher. We built a full 5% position in SNDK during the summer of 2012, sold half just prior to the July '13 earnings report, and then sold another 25% in early '14, leaving clients with a stub of a position as we enter into Q4 '13 earnings.
Readers have to understand that semis and the flash business is EXTREMELY cyclical as NAND capacity comes online very quickly and with little warning, resulting in EPS getting crushed substantially in a short period of time.
Here is our July '13 article on SNDK, which talks about the tough compares SNDK faces in the second half of '13, and here is our July '12 article on SNDK where we talk about how the stock's valuation in the low to mid $30's was too cheap.
Micron: If SNDK is cyclical, Micron is even more so as the DRAM and the NAND flash memory manufacturer is even more of a commodity play than the whole semi space, which is a commodity sector, but the Elpida acquisition, which puts MU firmly into the Mobile DRAM space, might be a game-changer for MU.
MU's November '13 quarter, which is scheduled for release next week, will be the first full quarter of Elpida's results included in MU's quarter. With the Street expecting $2.08 and $2.28 for fiscal years 2014 and 2015, MU's current p.e of 10(x) and 9(x) respectively is hardly expensive, but the growth of 10% expected in fiscal 2015 is nothing to write home about either.
Elpida, which was badly needed for MU given their Mobile DRAM presence, could make MU far less cyclical and thus far less volatile as a stock, but which also means MU could have far less upside potential in favorable DRAM pricing environments.
MU traded under $3 per share in 1990, soared to $94.50 in June, 2000 during the halcyon days of the PC and memory growth, and then collapsed in price, never to get close to those levels again.
MU could be an entirely different company now. Technically the breakout of the stock above the Sept '06 high of $18.65 is a positive sign. I don't think MU will repeat its 2013 1 year return of 250%, but a trade to $30 is certainly feasible if EPS continues to be revised higher.
Here is our last article on MU prior to the Sept. '13's quarterly earnings release.
Intel: still our value play in the sector, with a 3.5% dividend yield, INTC was up 25% in calendar 2013, trailing the S&P 500's 30% but still respectable for a company that has consistently guided inline or weaker-than-expected, we've begun to worry that INTC's capex requirement and the continuing no-to-slow growth in the PC space may have permanently derailed INTC's prospects to grow anything faster than 5% - 10% per year.
Here are our previous articles written on INTC both in Q4 '13 and then again in Q3 '13. We remain a frustrated long, but if the equity markets are choppier this year, INTC might be more stable than other semi / microprocessor names.
Relative to SNDK and MU, expectations are the lower for INTC, and we like that coming into what could be a volatile year.
We will be out with individual earnings previews that are far more in-depth than what we could do here, but I wanted to give readers a sense of how we are looking at the space from a portfolio weighting and allocation standpoint, and where the risk was from our perspective.
Our first earnings previews will be on starting with Micron and Intel on this site, this weekend.
Coming into early 2014, our heaviest weighting is now in INTC, our next heaviest weighting is now and we would look to add to both positions with positive earnings news, or guidance. We have been slowly reducing our position in SNDK, although we have about 25% of our initial summer, 2012 position, which was roughly 5% of client accounts.
KLIC is still a small position. Insiders have been selling but with ample cash-flow, we are going to wait on the small position we have for now, and see what quarterly earnings look like.
More to come. Thanks for reading.