For Immediate Release
Chicago, IL – December 1, 2011 – Stocks featured in this week’s Zacks Industry Rank analysis include Texas Instruments (TXN - Analyst Report), Kyocera (KYO - Snapshot Report), Altera ( (ALTR - Analyst Report), TTM Tech ( (TTMI - Snapshot Report) and Freescale (FSL - Snapshot Report).
Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.
Tech Base Crumbling
The larger semiconductor industry is broken down into a large number of smaller “industries” based on the type of chip they make. Of the 50 lowest ranked “industries,” 14 are involved in these basic building blocks of technology. Even more startlingly, eight of the 10 worst are from that group.
Some of these industries are extremely small; five of the eight have four or fewer firms in them. However, further down the list are a few industries with large numbers of firms in them. The largest by far is the sort of catch-all group, Electronic Components-Semiconductors, with 61 firms in it. The Miscellaneous Electronics Components group has 44 members.
There are a total of 177 firms in these 14 industries combined. Of those, 34 (16.9%) of them hold the dreaded Zacks #5 Rank, and an additional 50 (28.2%) have Zacks #4 Ranks. If the Zacks Ranks were random, then one would expect that 5% of the names in an industry would be #5's and 15% would be #4's.
Most of the firms shown below are either small (below $1 billion) or mid-cap firms (between $1 billion and $5 billion), and several are in the very tiny sub-$100 million microcap range. Only three -- Texas Instruments (TXN - Analyst Report), Kyocera (KYO - Snapshot Report) and Altera ( (ALTR - Analyst Report) -- are bona fide large caps with a market cap of over $10 billion. Those and the mid-caps most likely have options that could be used to bet against the firms, and they probably have enough liquidity that you could, if so inclined, short them.
As for the small caps, sell them if they happen to be in your portfolio, but if not, it is probably best to just ignore them altogether. For most investors, the significance of the weakness here is in what it is saying about those firms further up the food chain in technology, especially on the hardware side. This is not a red flag on those names, but it sure does flash a yellow warning light.
Valuations & Expectations
The valuations on these firms are all over the lot, ranging from seemingly super-cheap low-single-digit levels based on 2012 earnings, to those where the P/E cannot be calculated because the firms are expected to lose money. If you have a strong stomach and a long-term investment horizon, it might be worth taking a flyer on the super-cheap ones such as TTM Tech ( (TTMI - Snapshot Report) or Freescale (FSL - Snapshot Report), but even so you would probably be better off waiting a few weeks to do so.
The expectations are dropping like a rock. An estimate in motion tends to stay in motion. Thus it is very likely that the estimates will continue to fall, and that the true earnings will turn out to be much lower than the current estimates anticipate. Thus the “true” P/E based on both 2011 and 2012 earnings will be much higher than shown here. Very few of the companies pay a dividend, so there is no yield support for them.
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Contact: Dirk Van Dijk, CFA