The Capitulation Stage
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 4/1/2001
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We're close to that phase. We know the business outlook is nothing short of dismal. The second-half recovery has become a mirage. Companies are laying off workers, cutting costs and ratcheting down expectations. It's gloom and doom. Only the fittest will survive.
In last month's column I mentioned that the data we were receiving from the industry did not support the optimistic behavior of the Wall Street money managers. At INFRASTRUCTURE, we have been expecting the downturn for the capital equipment sector to accelerate during the March-April-May timeframe. It is likely that we will see business, as reported by SEMI's monthly book-to-bill report, to show a 50-60% decline from last year's record-breaking levels. The companies in the equipment sector are beginning to announce this to Wall Street despite the fact that many of the stocks are holding together. The big-name stocks have been particularly resilient during this downturn.
Why? Perhaps the stocks are holding together because there is nowhere else to hide. Unlike the sectors that have really questionable futures, we know that the capital equipment sector has to support the migration to smaller feature sizes, 300 mm wafer processing, copper interconnects, low-k dielectrics and new forms of packaging. This is a lot different than the dismal outlook for many in the dot.com sector - where hopes of positive cash flow and, for that matter, survival, have become a real long shot. The future of the chip equipment business is more visible than the gut-wrenching restructuring faced by the communications and networking companies. Visibility has a lot to do with the way the stocks are performing. Here is where the capital equipment sector has an advantage over other technology segments. Yes, we can say that, even if the future is way out on the horizon.
In the coming months we expect great opportunities to appear for investors that have positioned themselves to weather the storm. We have suggested to readers of our newsletter that they hold an inordinate amount of cash to take advantage of the coming weakness. History tells us that stocks in the capital equipment sector bottom in conjunction with the bottom in bookings and shipments. If we are right in timing the cycle, the bottom in business conditions should be in full view by the early weeks of May. From there we are planning to apply our cash in earnest to those companies that will support the advances in manufacturing technology we mentioned earlier in this column. As many of you know, the best time to buy is when the vast majority tosses in the towel - believing that technology is dead forever. It happens during every cycle.
The message? Be patient for a little while longer. The bad news is not going to end in a heartbeat. The downturn is probably going to be with us for a while, but history shows that when the bad news reaches a crescendo, stepping in to buy quality stocks pays off handsomely. Plan to buy gradually because no one can call the bottom with any certainty.
