I attended the Needham Growth Conference in New York from January 11th to 13th. This is a high-quality conference with CEOs from over 300 public and private emerging growth companies, doing group presentations and one-on-ones for eleven hours per day. There are also sector overviews and highly influential speakers.
One of my favorite speakers is Ed Hyman, a top-ranked economist. Ed was surprisingly bullish, after being neutral one year ago. He said that the recovery from the credit crisis is now over, and we are just entering the expansion stage. He said that we are "free and clear" of any economic recession for at least the next two years, and that we are "not Japan". He felt that Bernanke is and will continue to be a major stock market supporter. Moreover, he sees Obama becoming a catalyst to another leg up in the stock market run. Ed predicted Obama's new economic advisors are part of a move to the center that will culminate in a credible deficit reduction plan that will be announced in Obama's January 2012 State of the Union address.
Other bulls have added that valuations are reasonable using forward earnings, with semiconductors being cheap even on last-twelve-months' earnings. And where else can cash go without illiquidity (besides gold) - with interest rates at record-low levels?
My take on the companies at the conference was a bit different. Most of the strong emerging growth companies that I saw were priced to perfection, and the value companies were not as cheap as they used to be. Small-caps had a great run last year, doubling the performance of the S&P 500 - Russell Microcap +28%, Russell Midcap +23%, S&P 500 +13%.
I have been through enough semiconductor cycles to know that when analysts start using cheap P/E's as an argument to buy semis, that we are not far from the peak. Semis are cyclical. They trade in anticipation of the cycle. When growth rates start decelerating, which they are now doing, it's time to get out. We are currently short semiconductor stocks via the Semiconductor HOLDRs (SMH) ETF.
Needham's semiconductor sector presentation, however, was quite bullish. After growing 32% to $300B in 2010, it sees 5% semiconductor growth in 2011, with stronger growth in H2, and 8% growth in 2012. Positives include reasonable inventory levels relative to sales, capacity remaining tight (although it will dip from 95% in Q4 2010 to 83% in Q1 2012 before returning to 90% in Q2 2010), and P/E's should expand in 2011 (P/E's are slightly below 15x, norm is 15x - 20x). Also, Micron (MU) management commented that DRAM prices appeared to be stabilizing after declining sharply in previous months.
Needham believes the following secular trends should elongate the semi cycle:
- High Megapixel backside illumination image sensors - Omnivision (OVTI)
The plethora of smart phones and mobile computers/tablets have led to surging data and video traffic over mobile networks. Telecom carriers need Mobile Backhaul of this traffic to avoid network overloads. Communication equipment beneficiaries at the conference included Adtran (ADTN) for scalable Ethernet backhaul in developed markets, and Ceragon (CRNT) for low-cost microwave solutions in emerging and rural markets.
Flash-based, enterprise-class solid state drives (SSDs) appear to be taking off in 2011. SSDs had inherent speed/throughput, size, and ROI advantages over hard-disk drives. The advent of data-tiering by IBM (IBM), EMC (EMC), and other storage system companies along with cheaper MLC-based hardware should accelerate SSD adoption this year. STEC (STEC), the market leader presented at the conference, as did wannabes Smart Modular (SMOD) and OCZ Technology (OCZ).
Electric vehicle lithium-ion (Li-ion) battery suppliers have drawn plenty of attention from investors, as have their stock prices recently. Their rising popularity stems from the first signs of real electric vehicle adoption from automakers and truck fleet vehicles. Li-ion battery suppliers at the conference included A123 (AONE), Valence (VLNC), and Ener1 (HEV). Their stock prices have gotten way ahead of reality in my opinion.
Cloud computing continues to be a popular theme. Three cloud software companies that I visited at the conference were SuccessFactors (SFSF) for the second time, Right Now (RNOW), and Constant Contact (CTCT). All three of these companies are growing like wildfire. SFSF and CTCT are creating new markets while RNOW is replacing older competitors' legacy systems. All three face the same fast growth-profit sacrifice tradeoff. SFSF has chosen the lowest profit-highest growth path, while RNOW and CTCT are more profitable (with still low margins today), with only slightly lower growth rates than SFSF. All three stocks are expensive, with SFSF priced in the stratosphere.
One cloud computing device and software firm that I did not see at the conference was F5 Networks (FFIV). Last week FFIV lost 21% of its market value in one day after lowering Q1 2011 revenue guidance. Even after the fall, FFIV is priced at 51x trailing earnings and 9x revenues. Similarly, last week high-speed-connectivity hardware maker Acme Packets (APKT) had a 7% one-day drop, after having a 5x price increase in 2010. APKT is currently trading at 96x trailing earnings and 17x revenues.
There are a lot more F5 Networks and Acme Packets out there, as the Bernanke Put (zero short interest rate, QE1, QE2) has created an air of immortality amongst growth investors. But Bernanke is not God. He has been less successful guiding the bond market and the dollar than he has been with the stock market. Unless he receives divine fiscal intervention from President Obama and the currently divided congress, then the stock market also will start reflecting the higher risk of unsustainable US debt levels.
Disclosure: I am long CEVA, IKAN, OIIM, STEC.
Additional disclosure: I am short VLNC