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Technology Stocks : IDTI - an IC Play on Growth Markets
IDTI 48.990.0%Mar 29 5:00 PM EST
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To: Taut Knot who wrote (11456)12/30/2002 1:30:42 PM
From: Rob S.  Read Replies (1) of 11555
 
The semi industry is within 12 months of pulling out of the bear market cycle. This (bottom of cyclical bear markets) is historically a great time to buy semiconductor stocks. A few things are likely going to mute the strength of a recovery:

1] The leading telecommunications sector is increasingly commoditized and the big cap end customers in that sector are mired in huge debts that will take several years to pay off at the current rate. Some of this debt will be relieved due to bankruptcies but that will do nothing to help the over capacity in key segments of the telecomm market and will tend to increase pricing pressure.

2] The breath of competition in the semi industry has increased over the years such that there is rapid migration of competition to whatever area of consumption that turns hot. A recent example is in the WLAN space which quickly attracted over a dozen competitors for 802.11x chips and multi-mode parts. As a result, prices have quickly plummeted and new versions of parts are coming out at already reduced prices so that recouping of development costs is more difficult. What looked like a sure thing for many companies venturing into it now could turn into another area of massive over capacity and losses for most of the competitors.

3] The costs of semiconductor fabs has increased to the point that under these conditions the return on capital has deteriorated from that typical of the industry. The problem is that there is little way out of this: even when demand increases the ROI for semi firms is unlikely to return to the levels of past decades. This skews many ratios - P/S, P/E etc. should be lower than previous norms because the leverage from capital investment is lower.

4] P/E ratios are high. The semi industry has become a darling of Wall Street and individual investors. The story of semis has been fully told and absorbed by the investment community. Despite large drops from artificially high prices of the bubble mania days, P/Es are at least double the levels seen during bottoms of the past. A valid argument for higher P/Es and other ratios is that interest rates are at the lowest they have been in over 40 years - this supports higher ratios. But even with that taken into account, ratios are much higher than normal for major bottoms. Perhaps a new precedent will be established during this one.

2003 is shaping up to be a stock pickers market for semis and other groups of stocks. If we see a January effect rally at all I think it will be a time to take money off the table or sell calls against positions.
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