Expect Nothing; Be Prepared for Everything
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 9/1/2000
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As publisher of a newsletter that focuses on trends in the chip market and ways to invest in the industry, I have to say this has been one of the most interesting climates I have seen in a long time. I am a great believer in the Samurai Trader's Maxim: "Expect nothing; be prepared for everything." During the most bullish summer in the industry's history, several Wall Street bears have decided to call for the end of the cycle. Granted, chip cycles do tend to end when everyone is really bullish; but these calls are quite controversial given the evidence at hand.
After spending almost six weeks on the road I can tell you the industry is still healthy, and the up-cycle is still with us. I've said it before and will say it again: "Barring any macro-economic disasters this cycle should be with us well into the year 2001." I know that's not a real stretch, but predicting much beyond a single year strains the limits of credibility.
Now the bears have been loudest, but they aren't the only voices in the forest. Others believe we have another year to eighteen months of moderate growth ahead. There are even a few willing to venture out on a limb and say coming cycles will be more moderate because of the widespread use of semiconductors in new applications. That last group is one to worry about. Nirvana is not around the corner. Such words have been known as "famous last" in previous cycles.
Digressing a moment, this drop on Wall Street is not that surprising. The size of the fall can be questioned, but I doubt there has ever been a time when traders and investors have not over-reacted on the upside and downside. Late last year and early this year it was fashionable to price stocks using earnings and revenue estimates two and three years in the future. It's easy for Wall Street to do this early in the cycle because the industry typically is coming out of a big hole, and no one really has a handle on final demand. They can say, "XYZ is a strong buy because things are getting better" without a great deal of risk.
As the year went on, growth in equipment bookings and billings outstripped most forecasts, pulling in the arrival of strong financial results. As this became visible, Wall Street began to see stock prices as "irrationally exuberant" - thus the correction.
In the mid-part of the cycle (where we are today), shares typically trade more in line with near-term growth prospects. It takes a bit, but Wall Street gets its head on straight, and more realistic expectations are embraced. Capacity constraints become easier to understand. Basically this means standard ratios like price/earnings and price/sales become more meaningful. In the beginning of the cycle these do not matter because almost everyone is losing money and sales are in the dumps.
Do I need to say there are bargains out there? Contrary opinion states that when everyone becomes more negative on the equipment stocks (with limited evidence to support their position) we should prepare for a move to the upside. If this holds true, a rally should start in the coming weeks. Be prepared.
Carl Johnson is president and co-founder of INFRASTRUCTURE (www.infras.com). He can be reached by phone at 1-972-492-7208.
