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Heard on the Street: WSJ August 14th, 1997
Chip Analyst
Turns Heads
With Flip-Flops
----
By Susan Pulliam
Staff Reporter of The Wall Street Journal
Early this month, Merrill Lynch's semiconductor analyst, Thomas
Kurlak,
reported in two notes to clients that the "best of all hoped-for
scenarios" was
developing for semiconductor stocks. He forecast a 20% move up
for the
group.
Yesterday, he slashed his 1998 estimates for Micron Technology in
half,
downgrading the stock to "neutral/accumulate" from
"accumulate/buy," warning
that "the easy money has been made." Micron shares swooned 7
1/2, or 15%,
closing at 42 5/8. Meanwhile, rumors flew that Micron will be the
first in a
series of downgrades from the analyst in coming weeks.
How did the sunny outlook turn so gloomy in a little more than a
week?
Explains Mr. Kurlak: "Micron can't continue to cut costs as fast as
DRAM
[memory-chip] prices are falling. We've been complacent about
falling prices
so far this year because their costs have fallen faster. But in the
fourth quarter,
they'll run out of gas on that. So we lowered our estimates."
Mr. Kurlak is developing something of a reputation on Wall Street
for
breathtaking flip-flops. Despite his mercurial nature, however, his
following in
the investment community is so huge that the sudden
pronouncements often
provoke huge stock moves. The Micron comments not only
walloped Micron,
they also contributed to yesterday's drop by Texas Instruments,
which closed
at 119 3/8, down 2 1/2.
Before yesterday's downgrade, Micron shot from around $48 to $60
after
Mr. Kurlak forecast sunny skies for the semiconductor industry in his
Aug. 1
and Aug. 6 notes to clients.
But even rumors about a change in recommendation from Mr.
Kurlak can
send a stock down. That's what happened Tuesday, when talk
spread on Wall
Street that the Micron downgrade was coming. The stock fell 5 3/8
to 49 3/4
that day. Other analysts made comments Tuesday, including
PaineWebber's
John Lazlo, who put out a note to clients warning that DRAM
prices are falling
faster than expected. But Mr. Lazlo's note came in the morning,
and Micron
didn't start tumbling until the afternoon, when the Kurlak rumor
began hitting
trading desks.
Some investors, however, are getting fed up with the sudden shifts.
"To me,
what Kurlak is saying isn't exactly a news flash," says Larry Marx, a
portfolio
manager at Neuberger Berman whose fund holds a chunk of
Micron stock. "I
admit I find it a bit puzzling. What changed so dramatically in his
thinking in the
course of one week?"
This is hardly the only time Mr. Kurlak has done an about-face
lately. On May
29, following Intel's "pre-announcement" of disappointing quarterly
results, Mr.
Kurlak, like much of the rest of the Street, cut his 1998 earnings
estimates, in
his case to $10.20 a share from $11. The next day, however, he
perplexed
investors by reversing his previous day's call, raising his 1998
estimates, this
time to $11.20 a share.
Many investors pay attention to Mr. Kurlak because of his
reputation for bold
semiconductor recommendations. Yesterday's call on Micron
represents a big
change, since Mr. Kurlak has been one of the Street's biggest
semiconductor
bulls. He recommended Intel in September when it was in the
45-range, taking
into account its subsequent split. It closed yesterday at 96 3/8. He
recommended Micron at around 17 last July.
But Mr. Kurlak's credibility now may be suffering in some quarters. "I
don't
pay attention anymore because of the flip-flops. The volatility of his
calls
makes his research useless to me," says Stephen Bruno, a portfolio
manager at
Dalton, Greiner, Hartman, Maher & Co.
Mr. Kurlak says the complaining among investors is a classic "shoot
the
messenger" response. "If you try to be early, people complain. If you
wait too
long, people complain that you are late. The truth is nobody likes a
downgrade
in a bull market."
Indeed, many investors have complained that too few analysts are
willing these
days to make negative comments about stocks. But critics say their
problems
with Mr. Kurlak go beyond that. The shifting on his Intel earnings
estimate left
many investors scratching their heads. And some Wall Streeters
have long
questioned Mr. Kurlak's habit of producing year-out earnings
estimates that
are much higher than the consensus.
Some investors think his eye-catching year-out views give him a
way of adding
leverage to his changes in recommendations. His Micron
downgrade seemed
all the more dramatic yesterday because of the deep cut in his
estimate for
1998.
"I think the guy has pretty extreme points of view. His $4.05
estimate was
probably extremely aggressive and his $2.75 estimate may be
extremely
conservative. I don't believe anything has changed that justifies a
cut like that,"
complains Mr. Marx.
Responds Mr. Kurlak: "I look at the fundamentals. I don't like to
have an
estimate that's in the middle of the pack if I don't believe it. But
they are just
that -- estimates -- and they are subject to change."
Mr. Kurlak adds that the Micron comments following the earlier
bullish
remarks on the semiconductor industry don't represent as big a
change of
heart as it might seem. But what about his comments in the Aug. 1
note, urging
investors to "use this period to continue to accumulate positions" in
advance of
a "substantial stock price increase in the fall?"
Forget all that fluffy stuff up front, explains Mr. Kurlak. Turn to the
middle of
the Aug. 6 note, he says, where he warns investors should
"reconsider
portfolio weightings" and be on the alert for cyclical peaks in
semiconductor
stocks.
All year, DRAM prices have fallen steadily based on worries about
overcapacity. But until lately that hadn't hurt semiconductor
stocks, because
industry costs have been falling as rapidly as DRAM prices.
Part of the problem now, Mr. Kurlak says, is that the cycle for the
16-megabyte chip is peaking sooner than he had anticipated,
meaning that
production of the 64-megabyte chip is ramping up faster than he
expected. As
a commodity producer, Micron will have trouble keeping up.
Mr. Kurlak isn't the only bull who's throwing in the towel. In addition
to
PaineWebber's Mr. Lazlo, Brown Brothers Harriman downgraded
Micron to
a "sell" from a "near-term hold" yesterday. |
