Chip stocks breaking out of cycle
Semiconductor companies like Altera are shifting from cyclical to secular growth stories right before our eyes.
We can quibble about it. Altera, a high-quality proprietary semi, spoke at a conference, and it wasn't bad enough to freak out new sellers and was just good enough to force short sellers to cover. Finisar, a not-so-high-quality company, produced better-than-expected earnings and had a huge one-day move.
Here's my answer: When you review the comments about Altera, there was an undercurrent -- things are just better, not from inventory restocking but just better orders. When you review the guidance from Finisar about the optical world, you come back and say this isn't just a one-time blip, they have the products to make things go right for a while. Or longer.
These are all longer-winded ways of saying "Finisar and Altera are not cyclical but secular growth stories." Yet both sell at less than 1 times their growth rates!
If they were cyclical, that valuation would make sense, right? They need to be cheap right here because the earnings should be cratering now that the inventory build is done and we are reverting to a normal, slower-growth pace after a catch-up period.
But if their products are being used more and more because of the Internet tsunami and a need for faster, better communications that have nothing to do with worldwide growth, then they should be able to sell as high as double their growth rate.
That's the secular vs. cyclical debate of old, from the 1990s, before investing in tech became investing in a nuclear blast zone and we decided that tech was no different from plastics in the '60s or aluminum in the '70s.
The change from cyclical to secular is happening before our eyes, sometimes in big gulps, like in Finisar on Thursday or Altera two days ago, and sometimes in just gradual inclines, like Texas Instruments (TXN) or Integrated Device Tech (IDTI) or Marvell (MRVL). Most important: It has an ineluctable feel to it as we go into year-end.
Think about that as you ponder employment numbers. The group's being pulled away from the macro.
And there's plenty of room left to run as the cyclical-to-secular growth pattern plays out to managers who have gotten used to doing nothing but trading, or even shorting, these stocks on every lift.
At the time of publication, Cramer had no positions in the stocks mentioned.
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