Frank Jennings Likes National Semiconductor
From Barron's Interview with Frank Jennings
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Q: You said you like small-caps because they're cheap. Please explain.
A: I'm a M-U-L-D investor. I look for Massive Upside potential and Limited Downside risk. I like situations where if the coin lands heads up, you make a lot of money in the stock, and if it comes up tails, you won't lose too much. These stocks obviously are hard to find. By their very nature of having limited downside, they tend to be unpopular.
Q: Next?
A: Instead of going up recently, National Semiconductor has gone down. It recently hit a 1999 low of 9 1/8, against book value of $10, but is selling at only 0.8 times sales. Its balance sheet is okay. NSM is one of the most operationally leveraged companies in its business, and its earnings quickly would reflect a cyclical upturn in the semiconductor cycle. The chip industry has been in a three-year recession that may be at a bottom.
NSM's biggest business segment is in the analog mixed-signal area, which is a bridge between analog and digital. Briefly, NSM makes chips for two types of Web appliances. One provides computerless access to the Internet for cable-TV subscribers. The other is a stripped-down computer whose only function is to reach the World Wide Web.
NSM is a return-from-the-grave story. It has lost money over the past four quarters, and will again in the three months to May 31. This is like buying Chrysler in 1981 before it turned around. NSM has been restructuring itself over the past five years, and has invested heavily during a declining semiconductor cycle, especially in the Web-appliance business, where its chips compete with ones made by Intel and Advanced Micro Devices.
Q: What kind of event could turn NSM's stock around?
A: I think the cycle is turning now. The stock won't turn until some good news comes out.
Q: Like what?
A: The announcement of a big contract for chips for Web appliances. I don't know when that might be. But when the stock does move, it could run like Qualcomm did.
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