Will and all, a very successful fund manager is short some semi
equips now. He names only Lam. His fund made 89% last year and 46% in the first four months of 1999. The article is in two parts, with the stuff about the equips in part 2. He also reveals other interesting opinions about holding big techs LT.
Subscribers
interactive.wsj.com
"May 10, 1999
Info-Tech's Winners
If Buffett bought stocks like these, here's how he'd do it, says a fund boss An Interview With Rajiv J. Chaudhri -- Digital Century."
Excerpts...
Q: Do you have any rule of thumb as to how far ahead of itself a stock
can get?
A: If I believe the earnings can catch up in the next two to three quarters to
the valuation the stock might have right now, I wouldn't bother about it. If the
stock is at a valuation that will take it four or five years to justify, we would
get out of it.[snip]
Q: Let's turn to shorts.
A: One sector where we have been short is the semiconductor
capital-equipment area. The commoditization of hardware has negative
implications for the semiconductor capital-equipment companies. These
companies provide the equipment that is used by chip companies like Intel,
Texas Instruments and Motorola to make their products. And this industry
consists of companies like Applied Materials, Lam Research, Novellus, etc.
My premise is twofold. One, that because the demand for leading-edge
semiconductor technology at end-user level is not as strong as it has
historically been, the need for the chip companies to invest in vast amounts of
the latest and greatest semiconductor capital equipment is also diminished. So
the secular growth rates for the semiconductor capital-equipment sector have
been negatively impacted.
Q: Is this a negative for all the companies you've named?
A: The negative secular growth rate impacts all of them. Clearly, some are
much better positioned than others. And you have to differentiate between
them. Applied Materials actually is very well-positioned because they have
the broadest suite of products, the strongest management and historically one
of the best records in terms of execution.
There is also a cyclical negative: D-ram prices have started to come down
again. Now the semiconductor capital-equipment companies ship anywhere
from a third to a half of their equipment to the D-ram makers. And the D-ram
makers' capital spending plans are intimately tied to their cash flows, which in
turn are a function of D-ram prices. So as D-ram prices have come down
quite sharply in the last few months and look like they will continue to come
down in the foreseeable future, that is going to put a crimp on the cash flows
and therefore the capital-spending requirements of the D-ram companies. The
bottom line is that the rate in which the capital-equipment sector will grow in
the next couple of years is quite a bit lower than what Wall Street is expecting
will happen.
Q: Would you care to mention a particular short?
A: Our one short in this space is Lam Research. They have lost market share
to both Applied Materials and Novellus over the last several years. They have
undergone a fair amount of restructuring in the past year as a result of that. It
is not clear to me that restructuring has necessarily positioned them for
revenue growth yet. And in fact, I believe in the next couple of years their
revenue growth rates are likely to be quite a bit lower than the
better-positioned companies.
Q: The stock is where?
A: In the low 30s.
Q: What is your target?
A: I think it can get down into the low 20s. It has been as high as 39.
Basically, consensus expectations for revenues for next year are in the $850
million range.[snip]
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