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Fleckenstein has confidence in being a "short"
Building a gadget isn't the same as selling one
Unless demand emerges to turn all this tech inventory into sales, I see big trouble ahead. Here are the stocks that look most vulnerable when the sell-off arrives.
By Bill Fleckenstein
Tech bulls seem to be laboring under an illusion. It goes like this: If companies build inventory, all that effort will translate to consumers clamoring for the stuff that's been stockpiled. This is an iffy situation, as in, "If we build it, they will come." Given the lofty valuation of tech stocks, even if consumers do come, it might not be good enough. And if they don't . . .
Cell-phone stockpiling vs. cell-phone sales
Last summer, I talked about what I thought was an inventory buildup in cell-phone land, on the back of cell-phone vendors' expectations of taking market share in China. That, coupled with the hoopla over local-number portability, has created an absolute mountain of cell-phone inventory. Virtually every vendor that makes a part that goes into a cellular phone (or a personal computer, for that matter) has announced that business is better than expected.Money 2004.
Smarter, faster and easier
than ever.
Whenever we've had a hoopla period in the past, whether for Windows 95 or Y2K or the anticipation of 3G in cell phones, we later learned that considerable double and triple ordering was taking place. With Windows 95, at least lots of things were sold. With Y2K, lots of end equipment was sold. With 3G, it really didn't happen.
This is why I think we have another air-ball in the making, since I anticipate that "sell-through" won't materialize as expected. Thus far, local number portability has been a bit of a yawner in terms of driving cell-phone sales. I don't really know exactly what's happening in China yet, but I can't imagine everyone is going to be as successful there as they think.
Excess capacity + excessive valuation = vulnerability
So, virtually everything associated with cell phones has a chance to get whacked if it turns out that end demand is not spectacular enough, which is my expectation. You couple all this double and triple ordering with excess inventory and wildly excessive valuations, and that is a recipe for a big wipeout.
Vendors to networking-equipment companies have been bid up as well, and I think the networking business hasn't really shown any signs of a dramatic improvement, either. And then there is the PC arena. We know what Dell Computer (DELL, news, msgs) and Tech Data (TECD, news, msgs) have said recently about potential inventory building, and what Hewlett-Packard's (HPQ, news, msgs) balance sheet showed. We can see that the price of DRAMs can't get out of its own way. And even though Intel (INTC, news, msgs) raised its guidance recently, it will be interesting to see the company's actual results in January. I want to see how much of the company’s revenue comes from China, compared with the United States.
To the indigestion in hardware, I also would add Internet stocks, because once the tech tape starts down, these imagination stocks to end all imagination stocks will be vulnerable. Likewise, the chip equipment companies will be vulnerable. Their stocks will hit an air pocket once folks realize that all the orders they were so excited about were just the result of double and triple ordering in the absence of real demand for capacity -- and that the equipment orders will get canceled, as they often do.
Bout of nausea Nasdaq-bound?
So, long story short, I think that there is going to be a serious bloodletting in tech land somewhere in the next 90 days. I don't know exactly when that idea will be "investible," but I thought I would put it on the radar screen of folks who may be long some of these stocks, or may have the ability to own puts or get short. I would once again caution novices not to short. (For more background, please see my column, "The long and short of short-selling.") But I think that for those folks who are experienced and know how, a rare opportunity may be in the offing.
For those who don't know, I'll list the companies in these various arenas that I think are potentially susceptible to trouble. I am not short any of them at the moment:
In the equipment area: KLA-Tencor (KLAC, news, msgs), Novellus Systems (NVLS, news, msgs), Applied Materials (AMAT, news, msgs), and Lam Research (LRCX, news, msgs).
In the cell-phone area: Nokia (NOK, news, msgs), as a purveyor, and potentially Ericsson (ERICY, news, msgs), though I don't know it as well.
In the part-suppliers area: Texas Instruments (TXN, news, msgs), STMicroelectronics (STM, news, msgs), Fairchild Semiconductor (FCS, news, msgs), Silicon Laboratories (SLAB, news, msgs), OmniVision Technologies (OVTI, news, msgs), National Semiconductor (NSM, news, msgs), Analog Devices (ADI, news, msgs), Linear Technology (LLTC, news, msgs), and Maxim Integrated Products (MXIM, news, msgs).
In the PC world: Obviously there's Intel (INTC, news, msgs), Micron (MU, news, msgs) and Dell (DELL, news, msgs).
In the networking world: Cisco Systems (CSCO, news, msgs), Juniper Networks (JNPR, news, msgs), and parts suppliers Xilinx (XLNX, news, msgs), Altera (ALTR, news, msgs), and Broadcom (BRCM, news, msgs).
In consumer-related doodads: There's Microchip Technology (MCHP, news, msgs).
In the Internet arena: The Chinese Internet stocks seem a little too kinky to me. The ones that seem most interesting on the short side would be Amazon (AMZN, news, msgs), InfoSpace (INSP, news, msgs), and eBay (EBAY, news, msgs).
So, that is my short list of companies that might be worth investigating for the potential of downside action, beginning sometime in the next 90 days. Once again, this is not a recommendation to sell, but rather food for thought. I bring this all up now (though I have been thinking about it for quite a while) because it's starting to be clearer and clearer that local number portability is Windows 95 without Windows, i.e. just a lot of hype. Not that folks aren't going to take advantage of portability, but it's not going to be the new dawn that many had expected.
Hunting a juncture to convert insight into action
My antennae also have perked up due to the action in three stocks recently. Best Buy (BBY, news, msgs) has broken down pretty dramatically and was negatively affected about a week ago by its news of potential earnings disappointment. Electronics Boutique Holdings (ELBO, news, msgs), a specialty retailer, has been struggling for a little while now. So, too, has SanDisk (SNDK, news, msgs), the upside leader in the flash market and my barometer for the electronic doodad (all of which require flash memory) market. In any case, this week seemed like an opportune moment to share all these thoughts. Again, the tricky part is not figuring this out. The tricky part is figuring out when to implement the strategy, and that's what I am groping for. |
