Surviving the Battle
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 5/1/2001
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Allow me to talk about the near-term situation for a moment. No one has any idea how to answer when they are questioned about the depth and duration of this downturn. The next few quarters do not look promising because capital equipment bookings are falling to levels that can only be described as "shocking." I am not talking about a drop of 50-60% from the top - we may soon find out that bookings are headed toward the low levels posted in 1998. Has Wall Street priced this in yet?
When you look at the performance of the capital equipment stocks in the face of the NASDAQ's huge downturn, you have to be impressed. Most of the companies in the sector have not breached the lows that were set in October and November of last year. That fact in and of itself stirs another fear inside me: Investors are still too complacent. I have another fear that sees the stock market driving prices higher because they expect an upturn, and that upturn takes a long time to materialize. This is the problem with getting ahead of the curve - it may not be the only one in your path.
Given the carnage we have seen in the technology arena, there are those who will argue that capital equipment stocks are the best place to put your money in the technology group. If I were investing with a longer-term holding period in mind, I would tend to agree. In the near term, I wonder if the staying power of those who believe in the "no place else to go" theory will be tested when earnings tumble toward the red and revenues plunge to unbelievably low depths.
Despite the gloomy tone of that last paragraph, there is some hope. It's possible that, if the downturn continues at its current pace, the industry will hit bottom sooner rather than later. I would not rush out and bet a lot of money on a quick recovery, but I am certainly willing to entertain the prospects. I suspect we are headed toward a point where capital equipment companies will have to survive on the revenues generated by the sale of spares, maintenance and spotty technology buys. That means a long, drawn out bottom. But you never know...
One thing I have learned over the years is that we do not have to call the absolute bottom to profit from the cyclical gyrations of the industry. Yes, historical trends will show that stock prices typically bottom simultaneously with a bottom in bookings. The stocks really start running when we get confirmation from a big player in the equipment industry, like an Applied Materials, that business is actually getting better. Before these signs appear there is time to incrementally build positions in companies that will profit from the next upcycle. There are a lot of areas where the chip manufacturing process can be improved. To really make some money we need to find those companies that are positioned to bring productivity solutions into the market. This is where a hefty effort on the due diligence front makes profiting much easier.
