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Strategies & Market Trends : Tech Stock Options -- Ignore unavailable to you. Want to Upgrade?

To: Jerry Olson who wrote (30568)	12/7/1997 3:51:00 PM
From: HoodBuilder	Read Replies (1) \| Respond to of 58727

Jerry, both you and I are eternal semi equipment bulls but this is a copy of a post on the IPEC thread from Jay Harris. . .Jay is a semi equip bear and his thory makes sense, it also parallels Tom Kulack's opinions on a conference call he had late Friday that Robert told me about. Your opinion is always welcome! Hello to the CMP'ers, I'm back off a brief stint with whitetail deer hunting in central Pa. Lets hope my investment advice is better than my hunting skills.. I actually got too close to a nice buck's scrape line and blew any chance of having him for dinner. Maybe next year. In any event, I don't have a clew on what is taking place in semi land other than recent price action. A while back I posted price to sales ratios(PSR's) on some of the equipment guys with respective price targets. I commented that I gave the bulls the benefit of the doubt by annualizing the latest quarters sales and holding flat sequential quarters. Realistically, this is not a likely outcome. I expect modestly up sequential sales during the next quarter or two. Then I expect rapid sequential declines in revenue and earnings as memory market fundamentals "spill over" into equipment bookings and billings. The stocks are currently in the process of discounting 6 months out. Hence, the challenge in my mind is to determine an accurate annual revenue run rate from which to apply PSRs and subsequent price targets. I will work on this when I get back to the shop this week and post my best guess at particular entry points. Importantly, don't consider earnings in your analysis on the way down, or on the way back up ,initially, out of the trough. Remember, the best time to buy is when they are losing money. This is why we use PSRs. Frankly, we don't care if the company is losing money in the trough of the cycle! This is a natural event for any cyclical company. Sales are much less volatile than earnings and the best guage to value companys in the trough. Earnings are used to value the company at the peak of the cycle to determine peak cycle price points. Importantly, don't get distracted by all of the noise over Pacific Rim bail outs when investing in this group! Keep a faithful eye on memory prices before attempting to dollar cost average! This is the real problem and all of the capital in the world being injected into Korean Fabs will only extend the duration of the fundamental problem which is supply and demand and equilibrium price points for semi components. During the last cycle the Koreans cut their production of chips, but didn't cut their spending on equipment as a percent of semi revenue! This caused a temporary increase in memory prices and saved many fabs from going out of business in the short term. However, this also compounded the amount of excess supply relative to demand as the equipment spending came into production 9 months later ,and this is why the entire memory market is currently cash flow negative. I had a hunch this was going to happen. However, I have never witnessed a prior cycle in my career. Consequently, I did not want to disclose misinformation to members of the thread based on my inexperience. In short, I didn't have the bal.. to speak my mind. Well that was then, and this is now. Don't be in a hurry to invest in this group. This will be at least a six month hick-up! Oddly, the sooner bookings and billings roll over for the equipment group, the sooner true fundamentals will be restored to the memory market. A good rule of thumb is to bring equipment spending down below 21% of semi revenue until supply and demand come into balance. Equipment spending in the pacific rim has been running at approximately 28%, well above rates that were sustainable. Not being an analyst, I very simply study Micron Technology. These guys know more than the analysts, because they are the best in the world at making memory. This market is 50% of targeted global equipment spending. This market leads the equipment market by 6 months. When memory prices recover, equipment bookings and sequential growth are restored. This process could take 12 months this time around, because equipment managers are still bullish and fabs are really starting to lose money. Remember, the valuation sucking sound looms large at this stage of the cycle. This is because CEO's are bullish and tech stock inverstors love to use stock market volatility to get into to good global companys that are currently "hitting their numbers". Don't mistake an equipment selection for say a networker or a software company. Know the beast! Entirely different valuation metrics apply. What is the only thing worse than a semi bear market? My wife dragging me kicking and screaming to finish our Christmas shopping! Gotta go, I'm off to spend like congress! Hope this post helps, Jay