Technology stocks -- as judged by the tech-laden
-- have been brutalized over the past 11 months. The Nasdaq is down more than half since reaching an all-time high of 5048.62 on March 10. Last month, however, brought hope to investors, as the Nasdaq roared to a 12% gain during January. But after several brutal sessions in early February, on Friday the Nasdaq closed right where it started at the beginning of the year: 2470. Easy come, easy go.
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Still, a few groups within technology have continued chugging right along. Indeed, the relative performance in PC and semiconductor stocks has been very impressive in 2001. With that in mind, we decided to check in with Joe Valenzuela, a research analyst at
Fechtor, Detwiler & Co.
, an investment banking and brokerage firm that also provides overnight DRAM pricing to the
TSC Metrics section, to see what he thought of the moves in these stocks and to get his outlook.
Valenzuela just returned from a two-week trip to Asia, where he had the opportunity to talk with suppliers, original equipment manufacturers (OEMs), and companies that are in the thick of the semiconductor and PC industries, so we thought it would be the perfect time to talk with him.
TSC: I would like to get your general impression of what you saw while you were recently traveling in Asia.
I have been in the chip trading business since 1995 -- working with buyers at OEMs, sales reps at distributors, and traders at chip brokers. Right now, business conditions in the commodity semiconductor channel right now are among the worst I have experienced. After speaking with various spot market contacts in Asia, I am hard pressed to find any indications of a pick-up in business.
Chip brokers are finding it extremely difficult bringing buyers and sellers together, even when they have access to product at fire-sale prices. Accordingly, OEM buyers are having a horrendous time trying to manage their excess inventory. Distributors, too, are lamenting how their sales have evaporated.
TSC: What does the huge overhang in inventory in the DRAM market mean for the PC sector, and for the rest of the technology industry?
Roughly 60% of the end-market for DRAM is in PCs. The huge inventory overhang is symptomatic of a weak PC industry. With fewer boxes being sold, DRAM is simply backing up in the channel, causing suppliers to choke with inventory. The DRAM market is cyclical. In past periods of price weakness, the problem was supply driven. Demand was there, but the DRAM manufacturers got a little ahead of themselves with their production. In due time, the excess supply was worked off because there was still good demand.
The problem this time around is different -- it is demand driven. The PC industry has never seen this kind of weakness, and consequently, the DRAM makers are having a terrible trying to find a home for their chips.
Micron's stock is trading just off its 1995 peak. At that time in 1995, Micron was practically minting money making DRAM, and veritable renaissance in the PC industry lied ahead.
Why, with the worst PC market in history, would we believe that DRAM is bottoming here with nowhere to go but up? Does MU today deserve a similar valuation to MU in 1995, when Micron was earning $3.90 per share
presplit? It would be pure speculation to get into MU now just because business conditions are bleak. I don't see that reasoning.
TSC: Should investors wait until things get better, or is this a time to get long some of the semiconductor stocks? The best money will be made by those who are a little early rather than those who are late.
At Fechtor Detwiler, our mission as research analysts is to present the objective facts and to let the facts speak for themselves. Sure, if an investor guesses correctly and gets in a little early, there will be money to be made. But what about the investors that didn't wait until the fundamentals improved and bought MU at $90, $80, and $70 hoping to be a little early? The primary end-market for DRAM is drying up.
I don't think this is a bottom. I would rather buy when the fundamentals show some improvement
i.e. the PC market strengthens, some DRAM manufacturers shutter fabs, etc.. We're not prognosticators. We're more like sleuths who are constantly digging for information to get the whole story. We try to avoid theorizing.
TSC: The semiconductor index has been up big this year; is that rational in the face of the slowdown we have seen in the businesses? Has the market already discounted all of this and it expects great things in the second half?
I like to see supporting evidence. If fundamentals continue to deteriorate, why bid up stocks betting on a banner second half? I don't think this is rational.
With the volatility in the commodity semiconductor
DRAM, CPU, chipsets, flash, etc. market, it is impossible to look six months away with any accuracy. Impossible. In my experiences in the chip brokerage business, I have witnessed countless chip traders bet incorrectly on the daily and weekly direction of prices. And these are the people that live and breathe the business.
If investors want to mark up stocks without any supporting evidence, then that is their prerogative. I would rather be late with the facts on my side than be early based on pure conjecture.