Here's this one from Herbmeister - just change the date from 2004 to 2006.
(I wonder what he would do without the Internet)
HERB GREENBERG
Why semi stocks may be over-valued
Commentary: One source explains his dire forecast
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By Herb Greenberg, CBS MarketWatch.com
Last Update: 3:24 PM ET Jul 15, 2004
SAN DIEGO (CBS.MW) -- Wednesday's column on whether much of tech is a ticking time bomb, with one source's forecast of the Philadelphia Stock Exchange semiconductor index, or SOX, falling to 150 to 200 from its current perch above 400, didn't cause the typical "Greenberg you idiot" response I would have expected.
That's not to say there weren't a good number of chides for "always" being way too negative (you think?!) or for quoting someone without a name with that kind of forecast. After all, they say, any nameless nobody can say anything and get away with it.
Maybe they can, but I can't. Unfortunately, many sources for this column work at firms where they're forbidden to be quoted. The best I can do is point out that a source is bullish or bearish or that they have a long-standing record here.
In the end, the choice to quote them is mine and it's my name on the column. If I choose people who are right with their forecasts, the column looks smart and remains worth reading; if I don't, it doesn't -- and it's not. The goal is to get you information before you see it elsewhere.
In this case, the source who offered up the Sox ($SOX :
phlx semiconductor index sox
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$SOX0.00, 0.00, 0.0% ) 150 to 200 forecast was also actively quoted here (again, anonymously) pointing out the tech-related inventory issues that I was routinely assailed for mentioning in recent months.
He's not always right; nobody is. But when it comes to tech he's been more right than not with his early warnings over the last cycle.
There is one question regarding his forecast that nobody asked, but I will: Where does his target of 150 to 200 on the semiconductor index come from? Does he pull it out of thin air?
Actually -- no, and in a nutshell here's how he got there: He started by choosing two of the better companies among the 18 in the Sox -- Applied Materials (AMAT :
Applied Materials Inc
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AMAT15.80, -0.28, -1.7% ) and Texas Instruments (TXN :
Texas Instruments Incorporated
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TXN28.90, -0.28, -1.0% ) . One is a semiconductor equipment maker; one makes the actual chips. He then extrapolated the index from their valuations. "This is a very cyclical business," he says, "so you should use mid-cycle earnings to create a multiple."
Mid-cycle means the average of annual earnings for a company over a full cycle. For semiconductor companies, he believes a full cycle is five or six years. In the case of Applied Materials, average annual earnings over that period are around 50 cents per share. He then gives the stock multiple of around 18. "And 18 is generous," he says, "because Applied Materials will not grow revenue from the peak-to-peak this cycle. This is a no-growth cyclical; Caterpillar and John Deere are doing much better revenue wise, believe it or not.")
At a multiple of 18, the stock should trade at $9. Add another $3 of cash and you get $12, or 70 percent of Applied Materials' current price. If the Sox traded at 70 percent of its current value it would be 295.
But, wait: If Applied Materials were to expense options, earnings would be sliced in half, putting the real mid-cycle earnings closer to 25 cents per share. Multiply that by 18 times, add in the $3 per share of cash, and you get $7.50, or 44 percent of the current price.
At 40 percent of its current price, the SOX would be 168.
Doing the same exercise with Texas Instruments would put the Sox at 152.
Will the Sox ever really fall that low? This bearish source, who is short a number of different tech stocks, passionately believes so. "Everyone's so excited about semis," he says, "yet Applied Materials won't show revenue growth from the peak of its cycle several years ago and Texas Instruments won't grow its revenues. And its margins (before interest and taxes) are shrinking. Yet John Deere and Caterpillar will grow revenue and grow earnings and they're considered boring businesses."
Perception over reality is always part of the stock market story. In the end, however, reality always wins. "Once you get a cycle where things are worse, the illusion of constant growth is shattered," he says. "And when they're finally doing worse than old-line industrials, it's incontrovertible that there's a problem."
Calling Houston.
From the mailbag: John Ryskamp asks, "When do you think the 30-day home mortgage delinquency percentage will top 5%?" Answer: No idea, but they'll definitely go higher if an when housing prices fall and people can't tap their equity any longer to avoid the inevitable.
Will Cal-Maine's stock wind up going splat? Find out by reading the latest edition of Herb Greenberg's RealityCheck.
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Herb Greenberg is senior columnist for CBS MarketWatch.com, based in San Diego. He does not own stocks (except for shares of his employer, MarketWatch.com), and he does not sell stocks short or invest in hedge funds. |
