NXP Semiconductors Or Micron Technology: Which Is A Better Chipmaker Stock Investment?

Summary

• Lots of well-researched fundamentals on these stocks from qualified and capable analysts is in other SA articles.
• But your portfolio doesn’t grow on supply and demand economics or street commentary.
• Here is what price range forecasts are shaken out of the hedging bushes by the market-making community due to client big-money-fund portfolio managers’ block-trade order activity.
• And the histories of how well prior forecasts for these stocks performed under earlier forecasts when the upside-to-downside outlook was like it is today.

Behind the market's curtain

This article has no fundamentals-analysis content. All of that analysis has been done by the information-gathering world-wide staffs of the Market-Making [MM] firms, instantaneously communicated to their HQ trade-desk support staffs of experienced, qualified value analysts whose judgments are enriched by the block-trade desk’s minute-by-minute knowledge of what the (big) buy-side of the street is intent on accomplishing for their portfolios.

That input is used by the MMs’ arbitrageurs in negotiating hedging deals in the derivatives markets to protect the firm’s capital that usually gets involved in balancing buyer and seller appetites of the moment. It is that MM firm-capital price-protection insurance which reveals the knowledgeable expectations of coming securities prices.

The subjects of this securities comparison are Micron Technology, Inc. (NASDAQ:MU) and NXP Semiconductors, Inc. (NXPI).

All materials appearing from blockdesk.com have been approved for this usage.

Here are Friday’s Forecasts, and outcomes of prior like foresights

Figure 1

The Figure 1 table has two distinctive parts. The first 4 numeric data columns (B) - (E) are products of the analysis of current behavior of market professionals. Those columns and the one headed Range Index (G) report what that behavior implies about the current expectations of investment professionals for the likely range of stock or ETF prices in the coming 3-4 months.

The remaining columns report what actual market price activity produced when prior forecasts for each stock similar to those of today were used to manage investments under a common portfolio discipline. The Range Index column tells what percentage of each stock’s current forecast lies below the current market price. Under the Sample Size column heading a count of the number of prior forecasts with Range Indexes like today’s is indicated at (L), along with the total number of all forecasts available from the past 5 years of market days (M).

Think about the credibility of the current forecasts in (E). The proportion of those similar prior forecasts that could produce a capital gain profit becomes a significant measure. It demonstrates the capability of the forecasters to be helpful to the wealth-building investor. Its proportion as a percent of the prior forecasts sample is in the column headed Win Odds (H).

The Win Odds has an important impact on the Realized Payoff column (I) next to it, where the average NET gains of all the prior forecasts in the sample are reported. These results include the actual losses taken under our standard portfolio management discipline TERMD, applied to all forecast situations.

TERMD sets the top of each implied price range forecast (B) as a sell target for that single forecast. When first reached within the next 3 months’ closing market price that forecast position is closed so that the expanded capital can be immediately reinvested the following market day. If not reached in 3 months the position is closed and reinvested, regardless of gain or loss.

The true Risk~Reward Tradeoff in each investment is between the upside forecast prospect of (E) to be pitted against actual prior worst-case downside price exposures experienced during TERMD holding periods. The flavor of the prospective reward carrot (E) gets muted by the worst-tasting next-column experience headed Maximum Drawdown (F).

That point is viewed as the most likely high-stress point to cause an untimely termination of the adventure. A termination then would be at the least productive, most damaging point. This is real risk, the actual loss of capital, not what is conventionally offered as risk in much investment education theory – the potential worry over UNCERTAINTY of REWARD, the volatility of BOTH higher and lower statistical deviation from some PAST AVERAGE of price-change experiences. Mis-education that is a sad delusion.

Instead, committing to the portfolio management's discipline of a full 3-month time investment (but not beyond) may achieve potential recovery to profitability (if/when an investment is at an interim price below entry cost), perhaps even to reach the forecast sell target.

Between the target “cup” and the %Payoff “lip” serious adjustments to commitment enthusiasms can (and usually may) occur. They are indicated by the column headed Cred.Ratio (N) where the Realized Payoff achievment ((I) is contrasted with the %Upside Sell Target offering (E).

This more critical Reward~Risk comparison draws on the Win Odds (H) and its complement (of 1 minus H as a %) to condition the Realized Payoff (I) and the Maximum Drawdown (F) as indicated in the Odds-Weighted columns (O) and (P).

Figure 1’s rows provide all these important dimensions issue by issue for the securities in question. They are accompanied by similar boldfaced measures of SPY to give a taste of “the market” as most frequently observed by the investing public.

Also included for comparisons of the subject stocks are a much broader population average of over 2,700 other stocks and ETFs as measured on this day. This population data often reveals overly optimistic sell targets and abysmal payoff results. In contrast, the population’s “top20” issues, ranked by their odds-weighted prior forecast histories, typically present prior annual rates of capital accumulation in the +75% to +90% CAGR range and even above.

Keeping Score

The wealth-building score is measured in Figure 1 by the portfolio’s compound annual growth rate (K), or CAGR. Each holding in a portfolio contributes its part, given the emphasis of capital commitment dedicated to it. Here each available candidate is viewed as having an equal participation prospect on an all or none basis at this point in time and opportunity.

But CAGR is the meaningful standard. It makes the “speed” of wealth accumulation critical because the efficient use of time provides a non-financial leverage in attaining the portfolio’s goals. Recognizing that time presents a powerful (pun intended) function in the CAGR equation’s calculation, an understanding of each investment candidate’s time investment is important. In the financial community the “speed” of reward is measured in units of “basis points per day”. A basis point is 1/100^th of one percent, and the maintenance of 19 bp/day for a year doubles the capital involved.

Under the portfolio management discipline of TERMD the holding period times of capital commitment to various positions may be quite uneven. This is in contrast to the usual methods of measurement for portfolio performance, looking at all holdings during equal calendar periods. That style of measurement tends to encourage buy&hold investing strategies which result in grossly inefficient capital utilization when the significant leverage of time is considered.

This kind of passive investment management behavior is a hang-over of 20^th century investing economics when making holdings changes was quite expensive. At that time serious opportunity for positive reward increments was required to justify the cost of making holdings changes. Payback periods measured in multiple months to years could often be encountered.

Advances in transaction technologies now present paybacks of days to hours, with trends spurred by incentives among competing service providers.

When measuring the attractiveness of investment candidates in a wealth-building mission environment it makes sense to rank them by their demonstrated rates of capital accumulation. Figure 1 does that in their bp/day sequence, the last column on the right (R).

The ranking tends to favor stocks with recent favorable experience and degrade those with extended unfavorable market history. The potential for subsequent significant change in trend may encourage some overstaying of positions, or new investment choices preferring an investment losing its market-competitive edge. But it also may impede a too-eager repetition of falling-knife experiences where ultimate recovery may be reasonably expected.

Those effects may make a sense of the trend of forecasts useful in the investor’s preferences of one security over another when choosing to make portfolio changes. Figures 2 and 3 provide the recent past 6 months’ daily trend of MM price range forecasts, along with the data from Figure 1, for MU and NXPI.

Figure 2

Note: This is NOT a conventional technical analysis price history “chart”. It is a record of MM live-date forecasts of the stock’s near-term (3-4 coming months) range of likely prices. Forecasts made on the dates indicated, not after the fact. The vertical price-range forecast lines of Figure 1 are split into upside and downside prospects by the heavy-dot end-of-day market quote for the issue on the day of the forecast.

A measure of the imbalance between up and down possible price change implications is the Range Index [RI], which tells what percentage proportion of the entire forecast range lies below the current price. The thumbnail picture at the bottom of Figure 2 presents the distribution of RIs for the stock seen in the past 5 years.

Figure 3

Comparison of subject stocks

The involvement of NXPI with Qualcomm Inc. (QCOM) during QCOM’s potential management reorganization had obvious impact in NXPI’s price, with recovery from the extreme drop of Thursday to $92 to the Friday close of $100.

Such large, abrupt changes call for more historical perspective, provided in Figure 4, a once-a week extract of data from the likes of Figure 3, going back two years in time.

Figure 4

The Thursday price drop to $92 was more extreme than the reduction in expectations, so the NXPI Range Index [RI] declined to 22. On Friday the RI recovered to 34 as expectations also rose, but not by as much as did the closing market quote to $100+.

The current-day RI remains on the generically strong (of coming-price trends) side of the RI distribution as shown in the small, “thumbnail” pictures at the bottom of each Figure. RI appearances on the right-hand side of the distribution may urge market to get prices temporarily up in the forecast range to Sell Target objectives but they are likely to decline from there.

MU, on the other hand is in a more normal price trend circumstance. What is not so normal for MU in comparison to most stocks is to have ALL its prior mid-range RI experiences (MU’s is now at 52) be closed out under TERMD discipline in so short a holding time period (28 market days) at profitable outcomes. The fact that so many were successful is a strong encouragement to commit additional investment capital in MU’s direction.

Conclusion

Which stock would You rather have your capital use to build your portfolio’s value? They both have similar upside sell target move prospects around +13%. But MU has more credible outcomes, of over +12%, compared to NPXI’s only +10%. Coupling that with MU’s less than 6-week average prior holding periods to reach those targets, compared to NXPI’s over 9 weeks, the opportunity to grow value both more rapidly as well as more assuredly strongly favors the choice of MU over the appeal of NXPI as a special situation recovery candidate.

But even the latter choice offers the prospect of adding portfolio value at a rate of some +66%, 5 times that of the market-index ETF of SPY’s +13%.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So, our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they actually believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided, both in SA articles and on the website.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.