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Steve Bauer

Steve Bauer

Steve owned a privately held asset management firm and managed individual investor and corporate accounts as a Registered Investment Advisor - for over 40 years.

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Investing Wisely -- Semi's - Valuation Ranking via Comparative Analytics

My focus is "Investing Wisely", e.g. taking advantage of the Bull / Bear Cycles as they occur within the overall marketplace. Integrating modern analytics within these Cycles, means maintaining a process of the thorough fundamental analysis of many Companies and nearly 200 Industry Groups in my universe. I believe that this discipline provides the necessary clarity regarding the rotation that most all Sectors, Industry Groups and Companies goes through - from fundamentally favorable times to unfavorable times and perhaps back again.

The current position of Semiconductors is very low on my list of Industry Groups. Therefore, I expect it to take it on the chin during the time frame of my anticipated pullback. Clearly then, this 'Industry Group' does not, at this time, qualify as 'Favorable' and the shares of its component companies should likely be avoided or perhaps shorted.

This "In Favor" / "Out of Favor" analysis of mine has much to do with the same logic I use in my Valuation Modeling (see below). The huge difference is that I believe that Wall Street has a wonderful (built-in) system of rewarding and penalizing companies as well as Industry Groups that is definitely random and often without analytical substance. Therefore, my Industry Group analytics, to a very large degree, have to do with Comparative Analytics. Currently comparing Semiconductors with all the other Industry Groups provides a clear fundamental as well as technical short fall.

Within the process of my work, this comes under the title of "My Rotation Modeling" that has a fundamental platform but requires technical support and conformation to be effective.

As a Sector, the Technology and its component Industry Groups have always been fundamentally a problem to evaluate. It has also been difficult for investors to profit from consistently (that's except for a few companies like AAPL!) and for financial analysts to produce accurate future data. This is likely due to the revenue-dynamics and product supply/demand that is often tough to figure.

This perhaps explains why many companies trade for high multiples (perhaps 30 or 40 or more - times profits) during negative economic times, and end up trading for less than ten-times profits when company earnings growth having fully taken advantage of the improved economy.

Unfortunately, there are very few sources for good Industry Group Analytics. A coupe that I visit from time to time is: BarCharts current ranking of what they call "Sectoring by Industry Groups. And John Bollinger also does a good job of ranking. They even provide a "Detailed Opinion" and cover 200+ Industry Groups. It's kind of nifty for those who like this kind of presentation.

My Comparative Analytic focus (to invest or not to invest) on any company is heavily weighted on fundamentals. That means breaking down a great deal of data and information. My first query or thought is: is the Sector presently in a favorable or not favorable status? Then I go looking for the favorable and/or not so favorable Industry Groups within that Sector. Now you have a picture of the first level of my Comparative Analytics.

Just below, in my table, you will see 5 of the most highly capitalized companies within the Semiconductor Industry Group. There are approximately 75 companies (i.e. equipment semi's) in this grouping.

Valuation / Comparative Analytics Table: Semiconductors

Symbol Current
My Target Price Percent Above (+)
or Below (-) Current Price ("Tweaked")
PEG P/E Forward P/E (average) Divergence (Percent) then "Tweaking" for My Target Price Percent Comments My Analytics Weighting: Fundamental 40% Technical 35% Consensus 25%
INTC 19.6 + 107% 0.8 10.6 10.2 + 104% When my anticipated pullback occurs - Lower Prices are definitely Forecasted for All?
TXN 29.1 + 117% 1.2 13.5 11.2 + 1.21% (same as above)
BRCM 37.2 + 183% 0.9 31.4 13.5 + 2.33% (same as above)
AMAT 11.9 + 216% 1.0 26.5 9.8 + 2.70 (same as above)
AMD 6.8 - 40% - 50% 1.7 3.9 18.0 - 4.62 Possible Candidate for Short Sale. Hold off for awhile!

Notes: Fundamental Valuation, in today's marketplace, requires "Tweaking" the Results". This is with an eye on the short-term action of the company's Price Movement. This analysis also considers the, two year Forward P/E. Using this procedure produces very accurate Analytics for decisions at Inflection Points.

Most Financial Analysts determine the Price Target Range by estimating future earnings per share and then apply a price-to-earnings "multiple", also known as the P/E ratio. I prefer to calculate Price Targets (high / low) for both the current and next fiscal year by applying the stock's present multiple to the average professional analyst's estimate and then do some serious tweaking.

You might want to see my Intel Corp. Valuations and Price Targets in my SA "Articles".

The price activity as represented by charts of the Semiconductor Industry Group ($DJUSSC in StockCharts & other services) has continued to decline from the April highs. You may remember, in early April Semi's broke down from about 1176 to a low of 923 (that's a 22% drop!). After a small (declining tops) bounce in this September rally, it is looking anemic again. You might also remember that back in February 2009 it was trading at about 584. For me, that's quite an important consideration when deciding the "what" I am going to recommend to my Clients!

For a current (Up to the Minute) Chart of the Semiconductor Industry Group:

Click and Scroll Down here - http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID4095527

My work on Industry Group Valuation is determining the current worth of the strongest / weakest securities within the Industry Group I am reviewing. I then work on those specific strong/weak companies, which is both subjective and objective. This includes: management, capital structure, and prospect for future earnings (or lack of earnings) and perhaps the market value of the assets/liabilities. Quantifying these results provide the ability to create a "Ranking" of each and thus super "Comparative Analytics".

I believe knowing the intrinsic value of each company is important to consistently profitable investing. Within this discipline, I use qualitative (business modeling, governance, and target market factors, etc.) and is also quantitative (ratios, financial statement analysis, etc.).

The true actual value of the shares of a company is based on an underlying perception (right brain stuff) of its true value. This perception is obviously quite different for each investor and/or financial analyst. This is to say the value may or may not be the same as what you might calculate or think and most often is definitely different as the current market value (current closing price or price range).

The "art component" of consistent and accurate valuations is to employ a very comprehensive ranking system that enables comparative analytics to verify that a given company is currently a "strong buy" or perhaps a "strong short". Investing in other than the 'strong' (on either end) is just plain dumb! The "science part" of consistent and accurate valuations is to use a wide collection of information and data, and then throw out that which does not conform to yours or my criterion.

Although there are many different methods of finding the intrinsic value, the premise is much the same for all. A company is worth the sum of its discounted cash flows. This means that a company is worth all of its future profits and those profits must be properly discounted to account for the time value of money. Sounds simple doesn't it?

A good question is: why do stock prices fluctuate so much? With a smile, I have two answers: the first is - to allow me to do my homework and collect annual profits. The second is - that's the "reality" of investing in the stock market. I like / love it!

My Wrap:

So while I believe the General Market may be in for a pullback, the prevailing question from most investors is: How big will it be? Do I hold my current positions or do I sell? Etc. The answer will be obviously quite clear when it (the pullback) is over but an old axiom tells us to be prudent in times like this. You might want to remember that, Cash is always an excellent safe harbor. However, if you are a proactive investor, taking bearish positions may be also being wise.

When my anticipated market correction does finally arrive (and it will), it definitelyshould have a significant effect on the Semiconductors and many other securitiesin the technical sector. So, the second question is always - When? The answerto that question is one that we can be sure of: that is, there will be futurerallies and pullbacks as the marketplace cycles. You can easily confirm thisby simple looking at historic long-term charts of the stock market itself orjust about any company or ETF. The point is, and we all know, that they (Indices,Sectors, Industry Groups and Securities) all go through "cycles" in one manneror another. Typically, when over-extended prices occur, they turn down. The oppositeis also normally true - when over-contracted prices occur, they turn up. As referencedabove, this is part of "My Rotation Modeling" that is very compelling.

The trick is to have a research methodology in place that both take advantage of these facts and also offer an opportunity for profitable - future investment decisions. That's why I have always started my analytics process with detailed fundamental analytics, as partially described above, of either top tier Industry Groups or when anticipating a bear market inflection point a bottom tier Industry Group.

It is important that this Article be viewed not as a recommendation for the purchase or short sale of Semiconductors. Favorable to the process of "Investing Wisely", it is intended to suggest that this kind of work / analytics is vitally necessary prior to making investment decisions. Semiconductors for me, is just another (one of many) "bellwether" Industry Groups to help identify candidates for Buying and candidates for Short Selling as the marketplace "cycles" from Bull to Bear and back again over, and over, and over again. Thus, and the good news is: we are presented frequent and conservative opportunities to invest - Long - invest Short or to simply to hold Cash.

Source & Data Information: BarCharts, Bauer Capital Management, Bloomberg, Bollinger, CNN Money, Fortune, MSN Financial, RiskMetrics Group, Seeking Alpha, StockCharts, Reuters, Yahoo Financial, Worden.

Smile, have fun - "Investing Wisely".


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