Christopher Danely is the Managing Director of Global Semiconductor Research Coordinator at J.P. Morgan.
March 4, 2009 — Although widely held technology-sector stocks are suffering these days, there are some exceptions and bright spots for the savvy investor who knows how to pick technology stocks that show signs of endurance.
From buying or selling stocks based on valuation to investing in tech companies with hot-selling products, J.P. Morgan technology analyst Christopher Danely offers his ten rules for smart investing in technology/semiconductor stocks.
1. Don’t ever Buy or Sell a tech stock based on valuation. Tech stocks are still largely momentum investments. They go up if the estimates are going to go higher and go down if the estimates are going lower and seem “cheap” prior to a blow up, and “expensive” prior to a run up.
2. Exchanging higher revenue growth for lower margins never works. The reason many tech companies have such high multiples is the high margins and high cash flow they generate. When margins go down, multiples go down, ergo, stock goes down.
3. Lead times going out is good. Lead times coming in is bad. These are two occurrences tech companies will deny, deny, and deny ’til the cows come home. They will insist that there is no double ordering when lead times stretch out, even though their customers will openly admit it. They will also try to say their customers will not cancel orders when lead times come in.
4. Very rarely is “it’s different this time” a good rationale for investing in tech stocks. I can’t count how many times I’ve heard: “Inventory is better managed” or “Our biggest customer just blew up, but we’re fine.” In over a decade of covering tech stocks, VERY RARELY is it different this time. The reason? Human nature is difficult to change.
5. Technology company management is ALWAYS bullish. Tech company managements are often founders; they work very hard, and have a huge amount of skin in the game. The company is their “baby.” Case in point, my mom still loves me after I put her through hell and beyond for the first 25 years of my life.
6. “Looking through a tough quarter or two” never works. When a tech company blows up, the negative estimate revisions are usually much greater than anticipated.
7. Intel stock usually follows its gross margins. I have charted this axiom of semi investing back almost 20 years, and it still works.
8. When a tech company says, “Our revenue growth will come from the Medical or Healthcare end markets,” what they’re really trying to say is, “We have no revenue growth.” While electronic content is increasing in both applications, the number of units are tiny compared to cell phones or PCs.
9. Its never “just a one-quarter problem.” When a tech company blows up sometimes you hear, “its just a one-quarter problem. Business will be back to normal soon.” Technology stock corrections are at least two, if not three quarters of sequential declines, even worse when share loss is involved.
10. If a tech company either has or supplies into a hot-selling product, consensus estimates are usually way too low. Product cycles never cease to amaze me at how strong they are and how many people will buy the truly revolutionary products such as iPods, cell phones, BlackBerrys and digital TVs.
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