To: all the new blood/trial members:
you're a breath of fresh air, and I appreciate the various insights. Could you do a couple of things:
1. help me compose a list, titled "Noise", of all the bad sources of info about this industry. Let's start with everyone who, from mid-May till yesterday, put AMAT on their Best-Of-Breed/Select/Core Investment/Wild-About-It list.
2. comments/criticism/additions/subtractions on:
BOTTOM INDICATORS for semi-equips:(posted 6/10/98)
1. semi companies, particularly in commodity markets (DRAM) regain PRICING POWER. Semi profits (notice I said profits not sales or units sold) have to be up. Semi inventories fall. Micron's ASP rebounds. Before this can happen, enough fabs have to be shut down to relieve the overcapacity. Further equipment upgrades and die-shrinks during a period of overcapacity only prolong the torture. Several major players have to abandon the field.
2. CAPITULATION:The 5 stages of despair are:
A. "these stocks will go up forever; I'm fully margined;my clients demand these in the portfolio/mutual fund I manage" (Feb. to Oct. 1997)
B. "these stocks will go up again soon" (Oct. 1997 to mid-
May 1998)
C. "these stocks are a good value" (last three weeks till ?)
D. "this industry is too cyclical and I'm out; I just had a margin call; my clients/boss will shoot me if I keep these in the portfolio/mutual fund" (aren't there yet)
E. capitulation
3. CONSOLIDATION:semi-equip equity prices reach a low enough point that the strong and big decide they can get bigger by buying (rather than growing internally), and start eating the small and weak. For instance, in the last downturn, at the bottom AMAT used some of its mountain of cash to buy two minnows and invade KLAC's turf. KLAC responded by merging with Tencor. Hasn't started yet this downturn.
4. the last ANALYST downgrades. Excellent contrary indicator.
5. semi-equip BTB doesn't decline for 3 consecutive months. The BTB has enough noise in the signal that a single flat month-to-month isn't enough to bet on.
6. PRICE/SALES RATIO is at the lower end of the historical range. For AMAT, fair value (where the stock stays most of the time) is in a P/S ratio of 2-3.5 (this corresponds to a stock price of 26-45). Notice that the lower end of that range corresponds nicely with the 12/97 and 1/98 lows, which we almost reached again recently. The only semi-equip there yet is KLAC.
7. SEMI STOCKS trending up. In 1996, INTC bottomed in January, then steadily moved up, and AMAT bottomed 5-6 months later. This makes sense, since prospects for semis have to improve before they place big orders. I guarantee you that as long as INTC is hitting 52-week lows the equips will do poorly. How can you do well when your customers aren't?
8. let the MARKET tell you. Once we're in undervalued range (for AMAT, below 26), wait till we form a double bottom. These stocks will need to form a base, lasting a couple of months at least, so you can wait and get a bit of reassurance that what you're catching isn't a falling knife.
9. none of the above will tell you where or when the bottom will be, so BUY IN INCREMENTS, and make sure you won't have a margin call when the stock drops (another) 50% after you bought it.
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