<<Mr. Sam??? Whatdya think now? $9 ought to be a buy. Hope you are still lurking around.>>
I haven't posted in a long time due to professional reasons. Some at SFAM were concerned that I may have used inside information in reaching my earnings estimates several quarters ago because they were fairly accurate. Actually, I did not have access to any inside information of a material nature, and I referenced public sources for my information quite often. Still, because they were concerned about it, I quit communicating publicly about SFAM's fundamentals. I hope that everyone understands my decision. That's just the way it has to be.
Rather than speculate about earnings models and the like, I do feel comfortable sharing my current view of the industry and my personal positions in SFAM stock. After all, even the company officers report publicly their equity positions. Certainly, no one can object to my doing the same.
First, the industry update
No major companies in the industry have yet called a bottom in fundamentals, but I'd speculate that the bottom in stock prices is rather close (within a couple months). For one thing, DRAM prices have flattened, albeit with some DRAM manufacturers curtailing output dramatically. Second, many fabs have been postponed, and investment in capacity is close to zero. This is a necessary part of the bottoming process. The end user demand has to continue to increase while supply flattens. In itself, this lack of capacity additions suggests that we are still on the declining part of the cycle, not necessarily that we have already bottomed, but that it has been continuing for about a year is significant. 8-18 months for such a correction seems typical to me based on my experience, and we are nearing the end of that range. Remember that the stock prices will lead the fundamentals out of the bottoming process. Also, the reduced inventory in the distribution channel for chips is encouraging. This always happens when supply outstrips demand, but it sets up the next upturn because relatively small increases in end user demand get felt quickly by the fabs. Sustained pressure on the fabs gets translated into new semiconductor equipment orders. We're not there yet, but the building blocks are falling into place. Finally, end user demand for PC's continues to increase. Estimates are for 8-11% increases in 1998 over 1997, depending who you listen to. The communications area has slowed, but several industry watchers (Tom Kurlak, for one) see firming in communications despite the Asian flu.
When we do come out of this, the chip companies' improvement in fundamentals will lead the improvement in the equipment companies' fundamentals. The stock prices for the chip companies used to lead also, but the lead has narrowed in the last couple of upturns. Companies associated with CMP, low-k dielectrics, copper, HDP processing, and DUV lithography will do well on the upside, leading the equipment industry out of this. AMAT is the quality play for participating in the upswing. SFAM and CYMI also look attractive at current valuations. There are others that may do well depending on the timing of the upturn and what direction the major companies go with copper/low-k. NVLS and SMTL are two examples. Obviously, this isn't an exhaustive list. A rising tide will lift all boats to some extent.
In my account, I still hold some shares of SFAM that I purchased in June-September of 1996 at $12.75-$16. I also bought shares Aug 27, 1998 at $14 and Friday at $9.125. My most recent sale was 2/9/98 at $25.5. SFAM now represents 13% of my portfolio. Since increasing my postions last week, semiconductors (chips and equipment) now represent a whopping 38% of my portfolio.
Do your own research and draw your own conclusions.
Profitable investing,
Mr. Sam |
