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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Putting The Semiconductor Pullback In Perspective

    Microchip (NASDAQ:MCHP) warned that revenue and EPS will not meet expectations and guidance for the most recent quarter, blaming it on industry conditions and stating that they see the cycle turning down. The whole sector tanked, probably more a sign of nervousness than intelligent investment thinking.

    Microchip, along with competitors Texas Instruments (NASDAQ:TXN), Maxim (NASDAQ:MXIM), Linear Technology (NASDAQ:LLTC) and Analog Devices, is active in the analog business. It's a business with a large number of different end-users. It has a high R&D component and there is an advantage for the incumbent. It's been booming, in part reflecting heavy use of chips in automotive and industrial applications.

    I think what MCHP is seeing is a pause in the general economy, which I expect to continue at the new normal of slow growth. They expect that their own growth will resume within a few quarters.

    I don't think MCHP has a lot of visibility into other areas of the semiconductor business. As such, I'm not taking their remarks as a negative to my long term bullish views on Intel (NASDAQ:INTC) or Altera (NASDAQ:ALTR). These are different types of chips. Plus, they are long-term positions where the cycle is 2 years, for Intel, and 5 or 6, for Altera.

    Also, Altera and its fellow duopolist in the FPGA business, Xilinx (NASDAQ:XLNX) have been claiming that they could grow by displacing other types of chips. So any industry slow-down may not affect them proportionately.

    Finally, Intel is talking about what happens at the 14 nm node, the tri-gate architecture, as well as trying to buy their way into mobile. These aren't areas where Microchip et al compete.

    That leaves us with the observation that the market as a whole is going down right now, and acting very nervous, and running for cover in consumer staples, which are already priced high. I will be watching the companies mentioned in this post, and may very possibly buy them, or enlarge existing positions in ALTR and INTC, depending on how far the sell-off goes.

    After all, the analog chip companies have strong balance sheets and good dividend growth credentials. It would be nice to see the prices get down out of the stratosphere.

    Disclosure: The author is long INTC, ALTR.

    Oct 10 6:15 PM | Link | 2 Comments
  • IBM: Taking A Large Position

    International Business Machines (NYSE:IBM) has been meandering around since I took a position last year. At the time, I argued that Credit Suisse, which had downgraded the stock and put forth a price target of $175, had a flimsy rationale for their position. I'm doing OK: after it went down some, I added to my position, then after it went up some I took it back to standard size, meanwhile selling some covered calls for income.

    Over the past week, I've been studying the situation, and today I enlarged my position by buying IBM Jan 2016 150 Calls for $40. As usual, I'm using LEAPS for leverage, but as of this moment I haven't sold any covered calls over the position.

    Briefly, I don't think the current price reflects the potential value creation of capital allocated to R&D and buybacks.

    This is a long timeframe investment. While IBM routinely produces a large number of patents, the commercial value, if any, will manifest over an uncertain future period of time, calling for considerable patience. Similarly, the benefit of buybacks is more evident in retrospect, if and when increased EPS support higher share prices.

    I'm in the process of dotting the i's and crossing the t's on the (hypo)thesis that supports this decision, and I plan to do a formal article in due course.

    Disclosure: The author is long IBM.

    Tags: IBM
    Oct 02 10:39 AM | Link | 4 Comments
  • Housing: Homeowner Vacancy Rates Vs. Starts

    I'm holding unrealized capital losses on a speculative position in Louisiana Pacific (NYSE:LPX), a maker of wood products for the construction industry. I think the company is well-run, a strong player in a difficult cyclical industry.

    So the question comes up: when if ever will US housing recover? Here's a chart from FRED:

    (click to enlarge)

    Just kind of eyeballing it, the average vacancy rate appears to be about 1.5%, and the average total starts about 1,500 thousand.

    The thinking would be, that until the vacancy rate gets down to 1.5%, starts will continue to lag. I was holding some homebuilders when the financial crisis hit, and have always taken an interest in the sector, since low P/E's are common. Looking at the skyrocketing vacancy rate, I closed the homebuilder positions and went on to other, more promising investments.

    Of course the housing bubble relied on big banks as bad actors, issuing mortgages that had no prospect of being repaid, and passing the risk on to the GSE's and private mortgage and bond insurers. They made numerous fraudulent statements and misrepresentations in order to perpetrate the scam, and have since been punished, perhaps not as much as they deserved, but it's pretty much over.

    If you ask them what's wrong with the housing market, they will tell you the rules are too strict, and threaten to take their ball and go home.

    The simple fact is, that excess inventory was created, and it will have to be absorbed before the housing starts will recover. And the recovery will not be to previous highs, since they were unsustainable. It's very unlikely that new government backed sinks for low quality mortgages will be created anytime soon.

    The trends since 2010 are pretty clear, and they're going in the right direction. I'm investing on the basis that improvement will continue until what should be an equilibrium point will be reached in 2017.

    Homebuilder (NYSEARCA:XHB) stocks tend to have seasonal patterns, with optimism reigning in the spring and reality ruling later in the year. My take: now would not be a good time to take losses on LPX. Very possibly the position will show a profit sometime next year.

    Similarly, Homebuilders are worth watching, but entry points should be chosen carefully. If I get involved, most likely it will be Toll Brothers (NYSE:TOL), because they cater to the high end.

    Disclosure: The author is long LPX.

    Tags: LPX, XHB, TOL, Housing
    Sep 21 9:46 AM | Link | 4 Comments
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