Where's the Bottom?

Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 2/1/2001

During the second week of January I spent four days in Monterey, Calif., to attend the annual Industry Strategy Symposium. ISS is the event where forecasters gather to offer their latest takes on the state of the semiconductor and semiconductor equipment industries. Ouch...

Stocks have been pricing in this bad news for the last three quarters. Most semiconductor and semiconductor equipment companies have been banished to the woodshed. While there is downside risk, it is time to start searching for the bottom. Not the bottom in the industry, the bottom in the stocks. The stocks will bottom and start to rally well before the industry turns.

In an effort to find the bottom, many investors and analysts will dust off charts and spreadsheets to look for signs of life. Some will run to the forecasting community - there are forecasters out there who will tell you they can call the turn to the month. They will go as far to say they have a perfect record. Don't believe them. No one has a perfect record forecasting the cycle. Every cycle has unique characteristics, and this one is bound to be different than anything we have seen in the past.

In my years on Wall Street I have come to believe that one item makes more difference in the direction of stock prices than anything else: human emotion! Yes, hard numbers matter and they serve as useful reference points when buying and selling. These are tools for the rational. Most investors buy stocks when they feel good. They sell them when they feel bad. Their timing is horrible. Harness your emotions and you will make more money in the market.

Over the last few years stock prices have moved way in advance of changes in the business landscape. This is not necessarily because the analysts have made recommendation changes. They are often late in changing their suggestions. The shifts are more subtle than changes in analyst recommendations. Look at last year as an example: Most of the stocks in the capital equipment industry reached their 52-week highs in March 2000. That was more than nine months before what appears to be a very steep drop in bookings and shipments! If you look at the emotional (coupled with a bit of fundamental analysis) state of these stocks last March, you will see that many companies were trading at some absurd value to sales and cash flow. Investors were in love with these companies but the upside was clearly limited.

So, that's the point. Buy when they're down, sell when they're up. Mix in a little fundamental analysis, stay in tune with the cycle and it all works out.

How about today? We still have a few hearty investors who want to believe it is okay to own semiconductor stocks even though the news for the next few quarters is not going to be good. When this group tosses in the towel we will have reached the bottom. It's hard to say, but this might take place in the first quarter of this year - or in the second quarter. The exact timing does not matter. We just want to be ready because when that moment of capitulation takes place, it will be time to do some buying. Be prepared to take advantage of the opportunity.