Where are prices of Semiconductor-involved stocks headed?
Investor wealth-building typically comes from equity share price changes rather than from dividends or other fixed-income sources. Such price changes are difficult to forecast reliably because they are caused by humans competing with one another to capture the change benefits and avoid price change damages.
We let investment market professionals tell us what they see as likely stock and ETF price range extremes in the coming few months, to determine probable upside and downside changes as prices move from current market quotes. The pros’ expectation insights come from negotiating large volume stock trades between investment organizations adjusting holdings in multi-billion dollar portfolios. Their clients’ actions are, in turn, products of intensive fact-gathering research and careful investment judgments.
Our extensive actuarial history archives of market actions subsequent to the MMs’ forecasts allow us to daily calibrate the forecasts’ accuracy and reliability under a wide variety of market environments.
Our analysis process covers actively-traded equity securities in all industries and provides measures of price risk and reward directly comparable among a broad range of diverse prospects. It often signals changing attitudes of investors toward specific issues of particular interest.
Here is what is currently being seen for semiconductor industry securities, and what that implies for their prices in the coming few months.
The Reward~Risk Trade-off Picture
Figure 1 shows how a large number of major semiconductor producer and consumer stocks are being viewed in terms of expected likely coming stock price gains and losses.
(note: all materials from blockdesk.com have been approved for appearance in this article)
The numbered ticker symbols in the blue field are what are referenced by the corresponding numeric intersections of the upside-potential green horizontal scale prospective rewards and actual worst risk experiences on the red vertical scale of price drawdowns. Best prospects on this map for a long position are down and to the right.
Here Power Integrations, Inc. (POWI) at location , Cirrus Logic (CRUS) at , IPG Photonics (IPGP) at  and Diodes Incorporated (DIOD) at  may be among the most interesting. The SPDR S&P500 Trust ETF (SPY) at  is a market index reference. NVDA is at  and ON is at .
Which may be the most attractive of these depends on how likely are the Figure 1 outcomes to occur. That may be better determined from Range Index histories.
The Range Index is a measure of where a security’s current market quote is positioned (usually) between the extremes of likely prices being forecast by the hedging actions of the MM community. A 25 RI has 75% of the whole forecast price range above it, 25% below; 3 times as much upside prospective gain as exposure to price drawdown. A 105 RI is seriously overpriced, 5% (of the forecast range) above the forecast range top. A -5 RI suggests a price 5% below the lowest forecast price for the security indicated by the forecast.
Actual price change outcomes subsequent to MM forecasts are collected in an actuarial archive so that attractiveness impressions of a current forecast RI may be compared to similar up-to-down price prospect proportions of prior forecasts for that security. They go back daily to the year 2000. A simple standard investment portfolio management discipline produces histories of sizes and frequencies of gains and losses at all levels of Range Index forecasts for each security.
Figure 2 reveals how current semiconductor stock RI forecasts compare with their own like prior forecasts. That makes it possible to then make judgments about which of the securities of interest may offer the best choice of investment dimensions important to the investor. This form of comparison keeps the alternative choice selection decision at the investor’s preferences.
source: Peter Way Associates, blockdesk.com
What a sea of numbers! But be brave and I will help you categorize them and understand how the categories relate, so the more assured and likely-profitable stocks are identified.
This Figure 2 table has data arranged in rows as
[A]: column headers
POWI: stock symbols
2077: Aggregated issues averages
The data columns are in groups, by their headers
[A] to [E]: MM price range expectations-related
[G]: the upside-to-downside prospect – the Range Index
[H] to [K]: outcomes of similar RI forecasts by standard discipline
[L] to [M]: number and age of prior forecasts
[O] to [R]: risk & reward odds-weighting of outcomes
[S] to [V]: relevant SA interest and “street” price forecasts
If this is all too complicated for you, then before chucking it all in the “delete” bin, consider that so far in 2019, while SPY was rising 16%, data like this using the same approach has produced net-profitable results on over 1600 published positions at an annual profit rate of over one and a half times SPY’s 2019 to-date CAGR of +54%.
We don’t do the work just because we love having our noses constantly in numbers on computer screens. It is because the work helps folks who are a decade or more short of where they want/need to be to have a retirement actually happen. If that is not your need, then rejoice and live a simpler-than-this investing life. Be happy you are so well off.
For the others, please return your attentions to Figure 2, perhaps enlarged.
The key critical data for each stock is ultimately in column [R] which tells how fast this stock has produced prior position profits from forecasts like today’s. Figure 2 is ranked by column [R], with the biggest at the top. But we shouldn’t simply accept what we see in [R].
Consider the first two rows, POWI and CRUS, in column [L]. It’s what they call being “lucky rather than legit.” A sample of 2 or 3 forecast experiences out of 1,261 market days in 5 years doesn’t justify putting capital at risk. Now go down another two rows in [L] to see where conviction can begin and really take hold, in IPG Photonics (IPGP) and NVIDIA Corporation (NVDA), with historical samples of 39 and 291 prior forecasts.
The first two rows of [H] claim nothing but profits for POWI and CRUS at this forecast level, realized gains from “all” of these 2 and 3 experiences averaged in [ I ] as +19% and +17%. So, what about a next 2 or 3 experiences?
But in IPGP there were 39 experiences of a +16% gain, on average, including one loss out of 39 (that other 3% of losses out of 100 in the [H] Win Odds column). And when the NVDA sample size is 8 or more times as large as IPGP’s , the NVDA Win Odds score of 84% winners is worth a brag. That’s better than 5 wins out of every 6. How many investors do you know who can do that? Out of 291 tries?
To put all the other stocks in Figure 2 into comparison, a quick run down column [H] shows only one other stock scores above 84, and with a very credible sample of 100 forecasts. Still, is there any other dimension which might make this one, ASML, less desirable?
Yes, what limits ASML is the scale, or size, of its upside payoff prospect in [E]. Compared to the double-digit offerings of IPGP and NVDA, ASML’s maximum forecast price change of only +7.6% is just not competitive. And its small +7.6% reward paired with its column [F] -6.0% risk ratio is what explains why the [ I ] realized payoff is a low +5.4%.
That ASML payoff is only about half of NVDA’s [ I ] realization of +10.1%, coming from its nearly three times larger [E] upside price change prospect of +20.4%.
What boosts NVDA’s Figure 2 row-ranking by column [R] up into a higher position than ON? Semiconductor Corp. (ON)’s larger [ I ] payoff is a difference in the Win Odds of 84 for NVDA and 80 for ON. That, plus the average holding period of [J] 50 market days it took for ON to win its +12.2% average prize, in comparison to NVDA’s only 43 days to earn +10.1.
This gets a bit complicated. First, we examine the Reward-to-Risk trade-off. By weighting the [ I ] payoff data by its [H] Win Odds and the [F] worst Risk costs by the complement of [H], or 100-[H], as shown in [O] and [P], their net by simple addition in [Q] still favors ON by +7.9 to +7.1 for NVDA.
But when the required average holding periods are figured in, the [R] results, measured in “speed” units of basis points per day, puts NVDA ahead by 16.6 to 15.9.
A “basis point” is 1/100th of a percent, or 0.0001% which compounds annoyingly each day of involvement if you are a borrower, or advantageously if you are proposing the return on some capital investment. This explains its frequent use in evaluating financial proposals, including equity investment portfolio capital commitments.
How fine to chop the analysis hash?
We humans make decisions under uncertainty based on personal rules developed by our individual life experiences, somewhat conditioned by the reactions of other humans involved in the decision, or of their judgments of the likelihood of the outcome. Not many of us think exactly alike.
In considering one or more semiconductor-related equity investments to an equity portfolio tasked with a primary assignment of wealth-building, it is easy to dismiss the first two rows of Figure 2 as insufficient evidence for considering POWI and CRUS as candidates for investment at this time.
On stock symbol line 3 of Figure 2, the history of several recent years appears to attractively support IPGP in a primary position as an investment candidate.
If more than one stock may be appropriate to be invested, perhaps for purposes of diversification, the question arises as to which of ON or NVDA may be best to use in addition.
Is the choice (and its outcomes) your responsibility alone, or should you seek committee approval? Even without the committee, if your reaction to the perceptions of others is important to you it may color your preference between the two. Let's use columns [S] to [V] for these considerations.
Here we find that in [S] there are 20 times as many SA readers expressing interest in NVDA as in ON. Using the more sophisticated decision-support process lends support to favoring NVDA's choice as a second candidate. But it falls far short by tests other than familiarity, of its displacing the primary candidate, IPGP.
An example of that evaluation exercise lies in INTC, far down on Figure 2’s columns [R] and [S]. With nearly as many SA readers requesting info updates on Intel Corp. as on the market ETF SPY, and with (market-wide) nearly as much capital invested in INTC as in SPY, the extent of capital commitments in INTC may benefit from reinvestment elsewhere. Perhaps not a good holding.
Finally, as a reflection on what “street” analysts are telling the investing public. With columns [U] and [V], a comparison can be made between what the “street’s” own trading desks are signaling by their self- protecting actions in column [B]. Please recognize that [B] and [E] are one-quarter-year to one-third-year forecasts while [U] and [V] are for a full year.
Draw your own conclusions, but ours are that only in IPGP and SWKS do the street price projections come near recognizing the likely one-year interim possibilities.
Semiconductor stocks relative to the market
Figure 2 provides broad value and opportunity comparisons between its row by row stock symbol price change prospects. It also provides comparisons with SPY as an ETF market index and with our broad population updates of Market-Maker hedging price range forecasts on nearly 2,700 stocks and ETFs. Those are shown in blue at the bottom rows of Figure 2.
The S&P500 ETF SPY shows an 8.9% upside appraisal now by MMs. Prior forecasts with RIs like today have resulted after 3-4 months in gains in 3 out of 4 instances (75 Win Odds in [H]). This is a continuing healthy outlook, despite all varieties of political turmoil, domestic and international.
The large population of equities with forecast price ranges often shows, as they do now, larger expectations [E] +14.4%, than have been realized [ I ] (from their prior RIs) of +2.3%. Larger even than realized in the next 3-4 months at a +13% CAGR annual rate. Still, that is an encouraging backdrop to an industry whose top competitors carry MM price-gain CAGR expectations at two times or better than the population average.
The best 20 stocks in that population strongly outclass (as a group) much of this semiconductor industry, save for its very best. Average realized net gains by today's best 20 stocks of +12.3% with 90 of 100 Win Odds and 38-day holding periods produce +140% average CAGRs with pb/day averages above 27. It regularly is a rich mine for wealth-building investment selections.
Recent trends of price range forecasts
Like most semiconductor stocks in this period of concern over the potential for disturbance over China’s reaction to US trade negotiations, the public is reducing price on the IPGP stock. The MM expectations range, shown by the vertical lines, is reluctantly following, with proportionately easier upside sell-point targets.
From the smaller picture in Figure 3 of how the past 5 years of daily forecasts have been distributed by Range Indexes it can be seen that the current price is quite low.
That makes IPGP an attractive buy on a timely basis. Ultimate resolution of the Chinese issue may hasten the target sell-point exit opportunity and perhaps set the stage for IPGP’s longer-term competitive position in improving technology. IPGP's principal competitors are Chinese and may become victims of US tariff changes.
At present the best semiconductor stock buy is IPG Photonics (IPGP). Secondary choices are well behind IPGP, but are close between ON Semiconductor Corp. (ON) and NVIDIA Corporation (NVDA) as timely buys.
Disclaimer: 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 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 in the SA blog of my name. First months of 2019 to date have produced over 1100 profitable position closeouts at +140% annual rates.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IPGP 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.