Searching Amidst Illusion

Carl Johnson INFRASTRUCTURE -- Semiconductor International, 1/1/2000

Closing out the year, business in the capital equipment arena is as good as it has been since the last upturn. Device prices are relatively stable; demand is decent; foundries are short of capacity; the back end is capacity constrained; the Japanese are retooling their plan of attack; the Europeans are expanding capacity; 300mm talk is starting (again); the Koreans are minting money making DRAM; and the migration to sub-0.25 µm feature sizes is driving front-end equipment purchases. Business is good. It wouldn't be a big revelation if I said the rally of '99 took place for all the right reasons.

Well, what about next year? It looks good. Seriously, I am not going to sit here every month and mention the forces driving future semiconductor growth. If you are like me, you are tired of hearing the same old buzzwords! Do I have tell you that e-commerce is going to change the way you live? You know that! What I really want to tell you is how to make money off the trend. If you believe all the positive forecasts, making money should be a snap. Shouldn't it?

Easier said than done....

But hey! That's what I am here for, so let's give it a go! Here are a few thoughts from the idea list. If the upturn turns out to be anything like the last cycle, investment dollars will rotate into every crevice of the semiconductor sector. During the mid-'90s, just about any company with the ability to punch out a device or deliver a process tool was rewarded by Wall Street. This time is not any different. During the fourth quarter, a number of smaller stocks in the semiconductor industry started to participate in the rally. Being one who lives for the opportunity to make money, I placed some bets on a few of these small players - Genus, Tegal, Robotic Vision Systems and Micro Component Technology. These companies actually have some decent fundamentals (Yes, even if you are going to buy low-priced stocks you have to consider the fundamentals). So far, that strategy is paying off. If this cycle continues to build upside momentum, these little gems probably will fly.

I would be remiss if I did not address some of last month's comments. If you recall I voiced some concern about valuations in the semiconductor equipment sector. I even mentioned that some of the stocks in the group could fall by 25% to 40%. After suggesting four little companies in this column, some of you may be wondering about my sanity - "Now he's talking low-priced stocks, and before he was talking big correction. What a nut case!" Believe it or not there is a method to the madness.

If you have access to historical valuations, I would suggest you take a hard look at where many of the large-cap issues trade today. Are the risk reward ratios good at these prices? I would say not. When I take a gander at the Baseline Financial reports that we host at the INFRASTRUCTURE Web site, I see nothing but off-the-chart ratios. Wall Street is out discounting two and three years' worth of growth. I tend to be a greedy sort, so the closer we get to the top of the range, the closer I get to the exit door. I don't want to be completely out, but I do want to have some money in the bank so I can take advantage of any price weakness.