Heard in New England:
Investment Pros Put Their Chips
On Semiconductor-Supply Stocks
----
By Andrew Caffrey
Like many technology shares, semiconductor-equipment stocks have been
gutted amid angst about a spending slowdown for electronics such as
computers and wireless phones and about the overall economy.
Can you say: buying opportunity?
Some investors see the current environment for suppliers to the
semiconductor industry -- many of which are in New England -- as a
bargain hunter's dream. The pros argue that the industry is so cyclical that
the stocks are sure to explode again at the next sign of recovery. "You buy
these companies when everybody's so pessimistic," says Bernard Horn Jr.,
who runs Polaris Global Value Fund in Boston. "Whenever I've done that,
I've done very well."
On the other hand, even the pros acknowledge that there could be more
bad news on the way, which could knock the stocks a lot further down
before they climb back up. Just recently, industry giants Intel, Motorola
and Nortel Networks all reported weaker-than-expected results and
slackening demand. That's signaling one of two things: either technology
stocks are adjusting to significantly lower growth rates, or they're headed
into an outright downturn. Right now, investors aren't sure which. So the
risk is the stocks will sink deeper as more information is made public.
Why invest in the sector at all at this point? Some pros argue that when the
stocks bounce back, they'll climb so high that it won't necessarily matter if
you timed the bottom exactly right.
At this point, the momentum has gone completely out of the sector. The
Philadelphia Semiconductor Index is 45% the high it set at the beginning of
the year, but many equipment suppliers have been hit even harder.
Teradyne, Boston, MKS Instruments, Andover, Mass., and Varian
Semiconductor Equipment Associates, Gloucester, Mass., are down about
70% or more from their recent highs. On a price-to-sales basis, some
stocks are now approaching the lows set in 1998.
"We've taken advantage of the correction to buy"
semiconductor-equipment stocks, says Peter Higgins, a portfolio manager
for Boston Co. Asset Management. In addition to Teradyne, MKS and
Varian, Mr. Higgins cited PRI Automation, Billerica, Mass., and Brooks
Automation, Chelmsford, Mass., as companies he has bought recently or is
considering. He declines to disclose the size of his holdings.
But he adds an important caveat: "The only issue is timing." The stocks
could still go down, and the bargain you bought today could be a dog in a
few weeks.
"I don't think all the bad news is out," says Neil Wagner, a portfolio
manager at Boston mutual-fund giant Massachusetts Financial Services.
Mr. Wagner says many semiconductor companies have yet to reduce
capital-spending targets for 2001 to account for the recent slowdown. If
and when they do that, the lower numbers could cause another rout.
Even more bullish investors are treading carefully. Duncan Richardson,
who manages the technology-oriented Information Age Fund for Eaton
Vance in Boston, says, "I would not bet the farm on this idea they've found
the bottom."
But down the road the pros see a big payoff. Mr. Wagner has done
research that suggests investors would still do well in the long run even if
the stocks fall again over the next six months, as he believes they will. In
past cycles, semiconductor-related stocks typically plunged several times
before bottoming out. In years past, if you bought before the bottom, Mr.
Wagner says, on average, the stocks still tripled in value when the cycle
turned up and the market rushed back into the sector.
So despite his efforts to time the bottom of this current cycle, Mr. Wagner
says, other investors shouldn't lose hope if they buy stocks now that drop
in the next few months. "The real question isn't, are you going to make
money from here?" he says. "It's, how long do you have to wait?"
Meanwhile, Mr. Richardson and others say the industry's long-term health
is secure. Demand for the latest electronic devices isn't going to disappear.
What's more, the industry is on the verge of major technological upgrades,
such as moving to wider wafers that increase chip production, which will
require billions of dollars of new capital spending.
"If you're patient enough," says Mr. Horn, "eventually the market's going to
recognize these companies will grow again at some reasonable rates," just
not the torrid numbers of the past 18 months.
He and Mr. Richardson have been selectively buying stocks -- such as
Teradyne, when it hit the $25 to $27 range after warning two weeks ago
that shipments for the fourth quarter would be 2% to 4% below
third-quarter levels. Mr. Richardson notes the stock is trading near 1999
levels, but that now "I think the fundamentals" of Teradyne's business "are
much more sound."
Tom Newman, vice president of corporate relations for Teradyne, says the
stock valuations "don't make sense" given Teradyne's business, even under
reduced forecasts. Teradyne is diversifying away from the semiconductor
industry, and is seeing explosive growth testing newly built
telecommunications and data networking equipment. So even with a
softening in semiconductors, Teradyne is still looking at healthy growth for
next year.
Though the company has yet to issue its own prediction for next year, Mr.
Newman is comfortable with one analyst's estimate that revenue will climb
20% to $3.6 billion. Meanwhile, after the warning two weeks ago, analysts
drastically cut their estimates for Teradyne profit next year by 28%. So
even though the stock has ticked back to about $31 a share, Teradyne's
multiple is less than 11 times the $2.95-a-share consensus estimate
compiled by First Call/Thomson Financial. The recent price surge has
made Teradyne a little bit more pricey for some fans. But that doesn't
mean other investors have missed out on a bargain.
Indeed, some investors expect the continued uncertainties about
technology spending to produce a series of dips in stock prices over the
coming weeks. Teradyne "could still get down to $19 a share," says Mr.
Horn. "At that point, you just back the truck up and buy as much as you
can."
Among other stocks, Mr. Higgins and Scott Black, a value investor who
heads Delphi Capital Management in Boston, both like Varian
Semiconductor, which makes heavy-duty implantation machines and other
devices for chip making. Mr. Higgins, for example, likes the stock below
$20 a share. It rallied recently to $23, but even at the higher level, it's still a
steal -- less than six times the $4.01 a share analysts expect for the fiscal
year ending September 2001.
Another favorite name is MKS, which makes instruments to measure and
control gases used in semiconductor and other industrial production. Even
Mr. Wagner of MFS marvels at MKS's record: The company hasn't
posted an annual loss in the past 30 years, a rare feat in such a cyclical
business. |
