PM Buzz Zaino discusses the appeal of the industry dynamics in semiconductor and semiconductor capital equipment companies for his deep value strategy.
What is the appeal for a deep value investor in certain technology industries?
Because these companies do have their own cycles, especially product cycles, or those cycles associated with the economy, the owners of the technology stocks tend to be the growth stock investors. And when something goes wrong at the companies because their earnings miss or the cycle is against them, they tend to sell these stocks pretty aggressively.
But if they sell them, to whom are they selling it to. Who are the buyers? The other growth stock buyers don’t want to play. And the value guys tend not to be here.
So the accelerated selling creates valuations that become very attractive to us. When we look at them as a price-to-book, and price-to-sales ratios, they meet our value criteria. They typically have wonderful balance sheets, because they’ve done an initial public offering, or a stock deal, and they’ve paid down their debt and they have a lot of cash on the balance sheet.
So that it’s simply a matter of waiting for their own cycles to recover. At which point the stocks will once again become attractive to the growth stock buyer, and the stocks will run up, and we will reduce or eliminate positions at a generous profit.
The cycle is always there. It’s a common characteristic, over the many, many years and many cycles. So the persistence is something that you can count on.
What signals might tell you that prices are becoming attractive?
It’s always the fact that the company’s earnings are disappointing for the short term. My own philosophy is that there’s no such thing as low in these stocks. Because when the sellers want to sell, they don’t say, “I’ll only sell it at two times book or one and a half times book.” They say, “I just want out, and I don’t really care about the price.” And that’s when you get the valuations that are most attractive.
Do you try to predict where we are in the semiconductor cycle?
Well, I’m pretty agnostic. I let the market tell me what reality is. And so the current valuations reflect what we know today, and I accept that.
Article by Buzz Zaino, The Royce Funds
