For those of you who are considering a high-probability trade, I would suggest taking a long look at semiconductors.
There have been only 3 months in the last 10 years when KLA-Tencor Corporation (KLAC) has traded lower than yesterday's range; and only 5 months in which the Philadeldphia Semiconductor index was lower. Both of those times were at the bottom of the worst chip recession EVER - the summer of 2002 and February of 2003.
The underlying fundamentals of the semiconductor industry today are vastly different from that time 6 years ago. In the main, the sector is awash with cash and buybacks funded from ongoing cash flow (except for the memory makers); and even at this low ebb, most of the companies continue to be profitable, roll out new products, and some (like KLAC) are debt-free or are de-levering - the exact opposite of the current scam in financials and banks.
Note on Financials
I bought some more Ultra Financials ProShares (UYG) at $18.83. My one-year goal for this index is $45.00. Four weeks ago the imminent collapse of the two largest finance institutions in the world (Fannie (FNM) and Freddie (FRE)) was factored into the financials index (UYG) selling price at $14.00. Two weeks later, Merrill Lynch (MER) diluted its shares by almost 20% with write-offs and a secondary offering, and yet the stock rallied 19% off its opening lows. That sure seems like a bottom to me.
Trading in this market is a lot like an Indy 500 race going both ways - frontwards and backwards - at 200 mph. It's the backwards jaunt with the rear-view mirror that's the tough part. Most investment pros comment that this is one of the toughest, most bewildering markets in 35 years. So if you are younger than 56, you can be forgiven for being frustrated. But the big picture remains the same - this is the best buying opportunity for financials and semiconductors in a very, very long time. I fully expect both the USD and UYG to double from here within a year. Remember, if it "Looks good, you're too late". The ability to make high probability trades while the market frets over them is the key to superior results.
I will close with a recent missive from Citbank:
May BtB (Book to Bill ratio)
20 June 2008
…Time to buy (semiconductor) equipment stocks — The recent sell off in the market and our group has presented what is likely the last buying opportunity in many of these stocks for at least the next several Qs. Key buy indicators are nearly all green at this point, most importantly Y/Y IC unit trends and Y/Y equipment orders. There has not been a cycle in history where these indicators have been at these levels and stocks have not worked over the next 6mos. FormFactor (FORM) remains our top idea, followed by KLA-Tencor Corporation (KLAC), Teradyne (TER), Applied Materials (AMAT) (range bound until more confidence emerges around costs and margins) and ASML (ASML) are all Buy rated with a 12 month horizon.
- We rate FORM Buy, High Risk (1H) with a $30 target
- We rate KLAC Buy, High Risk (1H) with a $56 target
- We rate TER Buy, High Risk (1H) with a $17 target.
- We rate AMAT Buy, Medium Risk (1M) with a target of $25
- We rate ASML Buy, High Risk (1H) with a €26.00 target
Disclosure: I have long positions in USD, UYG, KLAC, TER, & FORM