In March 2011, Seeking Alpha published the article, "Risk/Reward for Semiconductor Stocks Remain Unattractive." Since that time, semiconductor stocks have declined. In the last four weeks, however, semis started to pare back some of their previous losses. Our fund actually covered its semiconductor short position earlier this month.
Semis had a lot of bad news in 2011 that depressed their stock prices, ranging from a weak macro, to sharp declines in 2H 2011 earnings to Thai floods. The current combination of reasonable valuations, low inventories, and recent U.S. economic strength, however, plays right into the hands of early cycle beneficiaries like semiconductors.
This week, companies like Linear Technology (LLTC) and Xilinx (XLNX) reversed the industry trend and actually raised guidance for the current quarter, setting a positive tone for the group. An interesting analysis by Pacific Crest Securities, shows the last 10-year revenue trends of the Big Three programmable logic device (PLD) manufacturers - Xilinx, Altera (ALTR), and Lattice (LSCC). PLD producers' revenues fell sharply (-18%) in 2H 2011. Historically, declines of this nature set the table for a subsequent five-quarter rebound for PLD stocks.
The question du jour is what will be the trajectory of this nascent rebound. PLD's have above-average secular growth relative to more traditional memory and PC-related chip companies. It will be interesting to see what Intel (INTC) reports after tonight's close. Most economists project an upcoming second-leg of US economic recovery to be more moderate than what we experienced in late 2009-2010. Similarly, semiconductor companies' visibility is still limited, and analysts are expecting a more subdued rebound after inventories become normalized.
The primary driver for this year's semiconductor stock price appreciation, and for the market in general, should be rising valuations. The stock market and certain semiconductor stocks are reasonably valued in light of today's very low interest rate environment.
|PC, Games, Diverse||11.9x||10.2x||2.4x||1.4x|
|Analog / Mixed Signal||16.6x||14.5x||2.7x||2.8x|
|Analog / Power||16.9x||14.1x||1.8x||1.7x|
So while we are not raging bulls, the risk/reward for semiconductor stocks have improved enough for us to remove our short position on this sector.