I have been asked to explain my "faux pas" with IRF and my analysis for the near and longer term future, so here it is.
Why did I buy? I have followed IRF for quite some time and had some great runs with it. It was one of the few stocks that in the last rally made a new recovery high, thus a good candidate if another rally developed. Well, the market was getting close to my target of 2050, where I thought we will get a small bounce of about 130 Naz points until the middle of next week (that scenario is now being replaced with a weaker bounce, probably no higher than 2080 and probably over with no later than Wed). IRF was getting very close to a support at $56 (my buy was just around $56-1/4 and earlier this spring I had an excellent run from around $56 to above $67 and then few more smaller runs since), and thus I was hoping for a run of 10% or so to the $61 area. I did not expect a pre announcement since they had already reduced expectations from a record quarter to just around $250 MM or so. The warning took me by surprise, but late Thursday in AH, I could not resist the bargain just under $44, bringing my average a little lower to $48.
My plans: I have removed for the time being the GTC at $35, and going to watch how we do tomorrow morning. The main support here is at the March/April lows of $31/$33, the December lows are just above $27, and it is no "impossiblle" for the stock to drop that far and even establish new lows. After all, at their current rate (the newly reduced sales rate of $180 MM/Q), their earnings are going to be around $1, and if the market becomes very pessimistic, the stock could go as low as 1.5 BV (around $24), or 15 times 2002 earnings (which I expect will be ratcheted down by analysts to $1.60 (I have next year at $1.8 but growing rapidly again by 2nd Q next year).
Short term tactic: If I can add at the $33-$36 range for a minor bounce, I may, but most likely, I will simply use any bounce to get out around the $38/$42 area (it can run very strongly, if the semi performs). My stop loss is going to be at $31.25 and if that is breached, I may reestablish a position latter (depending on where the market and the stock is later this month).
Longer term, IRF is really no that exposed to the telecom/datacom business , and even though they forecast that segment to go down by as much as 70%, it is probably accounting for no more than 20% of sales. Their crown jewel are their proprietary products and power products, accounting for 37% of their sales, and they have a very strong presence in the electronification of the automobile, which together with consumer and aerospace products is 30% of their sales. They are very well diversified, have a lot of cash on hand ( about $850 MM or more than $13 /share), and despite the slow down, they are going to make a profits. Compare this to NSM still selling at $26 but they broke even in the last quarter and are going to lose probably $.90 over the next two quarter, and next year be lucky to make $.60. Roughly twice the sales, but three times as many shares. LT, I mean by next April, I would not be surprised to see IRF once again getting well above $75, based on expansion of multiple to 30, and forecasts (by then) of $2.5/share for 2003 (which will probably be proven wrong by the end of 2002).
Finally, few immediate observation, IRF's RSI has dropped to 28, often an area from which it launched major recoveries, unfortunately, all other techical indicators are still weak. If OBV can turn up here, particularly after the huge volume day Friday (I think a record for IRF?), then it should be ready to frollick in the short late June early July rally I still expect. It will be interesting to see if IRF continues very weak later this week when I expect the general market to tank badly.
Zeev |
