Semiconductor Capital Equipment Stocks Discussion
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- SteveT
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» Kirk - Analyst Brett Hodess
Ever wonder where Bob Brinker got his picks NVLS and TER? This report is on one of his two favorite analysists, Brett Hodess or NationsBank/Montgomery/BofA.Posted on Silicon Investor:
To: +CobaltBlue (27491 ) From: +Henry Eichorszt
Thursday, Dec 31 1998 3:55PM ET
From thestreet.com -SAN FRANCISCO -- These days everyone's feeling good about
semiconductor equipment makers like Applied Materials (AMAT:Nasdaq) and KLA-Tencor (KLAC:Nasdaq). After all, Applied Materials is now trading at a generous 71 times earnings and KLA is at 38 times earnings.
But back on July 21, it was another story. The industry had been in a slump for a year. Applied Materials' P/E was 19 and the stock was trading at 30, 40% below its August 1997 high of 50. KLA sported a P/E of 18 and was trading at 27 -- a whopping 63% below its August '97 high of 74. No one saw any sign that the industry would recovery any time soon. No one, that is, except NationsBanc Montgomery Securities (now BancAmerica Montgomery Securities) analyst Brett Hodess.
He had the gumption to hold a conference call with some 170 fund managers and tell them the bottom was nearing and it was time to buy equipment leaders like Applied Materials, KLA and Novellus (NVLS :Nasdaq). His firm is not an underwriter for any of the stocks.
DateRatingActual pricePrice change since last moveNov. 21, 1996Upgrade16 --Nov. 17, 1997Downgrade35119%July 21Upgrade31 15/16-9%Oct. 8 Reiterate buy22 3/8-30%Dec. 18Current45 7/1642% since July 21 upgradeDec. 18 Current45 7/16103% since Oct. 8 buy ratingSource: NationsBanc Montgomery Securities.
Other analysts sneered. "The outlook for the next six months is very bad for capital equipment sales," Merrill Lynch analyst Mark Fitzgerald said. He predicted new lows for the group and maintained a neutral rating on Applied Materials.
Hodess says he too was nervous about new lows. But there were three things he noticed. First, the equipment sector was showing price-to-book and price-to-sales valuations near historical lows, but the companies were better capitalized and therefore fundamentally stronger than in the slump of 1996. Secondly, semiconductor giants Intel (INTC:Nasdaq), Micron (MU:NYSE) and Texas Instruments (TXN:NYSE) were announcing 0.21- and 0.18-micron products. "But none of these guys had 0.21- or 0.18-micron equipment," Hodess says. For the companies to come out with the products on schedule, they would need to order new equipment soon. Finally, he knew that once equipment stocks start moving, they move up fast, leaving behind investors who wait too long.
Yang Lee, a manager for the $2 billion Third Avenue Funds, was buying low-priced equipment stocks before Hodess made his July call but didn't expect the stocks to pick up as soon as they did. "Everybody was saying not yet," Lee says. "Hodess was the first pounding the table."
But for the most part, the Street didn't listen. Although Applied Materials rose 9% in the two weeks after his call, it then sunk 36% to close at 22 3/8 on Oct. 8. Yow!
"I was getting a lot of flack through August and September," Hodess recalls. "A lot of people were questioning how I could be so certain that orders would bottom by year-end." At the Montgomery Securities investment conference in mid-September, Hodess was clearly nervous and said a new low could be reached in December -- which happened. Applied Materials, for example, dropped by 13% from Dec. 8 to Dec. 14. ("Typically late in the fourth quarter everyone starts questioning whether PC sales are really good or not," Hodess says.)
In a Sept. 25 report he tried to cover his tail. "With the potential for orders to continue to show small declines through the end of the year," he wrote, "the stocks are unlikely to sustain a recovery in the next several months." But he didn't change his ratings, and he continued to tell investors to buy the equipment leaders.
On Oct. 8 the Philadelphia Semiconductor Index hit a two-year low and Hodess got back on the phone and rustled up those 170 odd fund managers. This time he said his previous call was early but now the bottom had been reached and the stocks would go no lower. Buy, buy, buy, he said.
And the stocks took off. In the three months after he reiterated his buy call, Applied Materials rose 103%. Not everyone saw this even in October. In an Oct. 9 report, BancBoston Robertson Stephens analyst Sue Billat had issued a buy rating on only one of her equipment stocks -- Teradyne (TER:NYSE). The rest, including Applied Materials, she rated long-term attractive. Robbie Stephens is a managing underwriter for Applied Materials. Needham & Co. analyst Theodore O'Neill downgraded Applied Materials from buy to hold on Oct. 8 and reiterated it on Nov.
3.
Brett Hodess
Source: Nationsbanc Montgomery Securities. To say that Hodess has semiconductors in his blood makes him sound like a Star Trek character -- but he did spend three years working for his father's company, Hodess Building, which builds semiconductor clean rooms. Before that, he spent five years as an Intel research engineer after getting a B.A. in physics from Bowdoin College in Maine and a B.S. in engineering from Columbia University. Hodess later went on to get an MBA at the University of California at Berkeley. He has spent the past seven years at Montgomery. Since then he has been named to the Institutional Investor's All-American Research Team three times.
What next? Hodess is already looking for the next downturn. The time to sell, he says, will be when lead times in orders from semiconductor makers start to shorten and plant utilization rates start to drop. Most analysts, he predicts, will rationalize the first declines as a healthy cooling of an overheated market. "That's usually crap," he says. "It's usually the beginning of overcapacity."
That's calling 'em like he sees 'em, Hodess style.
See Also
SILICON VALLEY ARCHIVE
Applied Materials
Company Quotes
-- posted by Kirk
» Kirk - Nov Book to Bill 0.84
MOUNTAIN VIEW, Calif., December 17, 1998 -- The North American semiconductor equipment industry posted a book-to-bill ratio of 0.84 for November 1998, it was reported by Semiconductor Equipment and Materials International (SEMI). A book-to-bill of 0.84 means $84 in orders were received for each $100 worth of products shipped. Month Shipments Bookings Book-to-Bill
June 98 1,265.5 932.7 0.74
July 98 1,112.1 717.6 0.65
August 98 1,011.8 571.6 0.57
September 98 (final) 845.7 481.3 0.57
October 98(revised) 834.4 623.5 0.75
November 98 (prelim.) 962.9 805.0 0.84
-- posted by Kirk
» KirkL - Dec Book to Bill = 0.94!
WOW what a recovery!See full story and chart here
When Intel makes money, it can spend it on the next generation of semi equipment. Remember the Key sign I saw was when Intel invested in Micron (MU) a few months back indicating that it needed a good supplier of memory thus the glut horizon had visibility. (I posted something to this effect here calling for a possible bottom and increased investment in the sector if my memory serves me. One of my goals is to record what is happening as the semicap sector bottoms so we can take advantage of it the next time it happens.)
-- posted by KirkL
» KirkL - Key Turning Point
This was Key...2 posts on Micron investment by IntelLook for something unusual and Intel investing in an industry that supposidly had a huge glut expected to last several years was this item.
A good industry analysist will see this and notify his or her clients. Of course, the big ones paying the big bucks get told first! by the time your broker calls.... profit taking!
Actually, this sort of stuff was not seen by many "professionals" as was indicated by the prices we were picking up stocks in the sector for at this time.
I actually heard of a new Mutual Fund system today. The guy follows money of "smart individual investors, often those posting in SI" figuring the small, smart investors are not burdoned by politics and stuff investment bank analysists have. He looks for many small trades in undervalued technology stocks. Fascinating!
-- posted by KirkL
» ron - Charts
Steve, I use the quicken charts alot and have my portfolio there. I ran across a pretty neat chart place its http://bigcharts.com you can do alot of things with these save many different ones to a list and so on. Check it out and let us know what you think in comparison to quicken.-- posted by ron
» SteveT - Re: Charts
Ron I must have hit it on a bad day. I used Bigcharts in the past but got away from them. I did try again this morning but found it hard to get them to do what I wanted. It seems like there is a lot possible options. Maybe I just need to spend a little more time on it.-- posted by SteveT
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