• February 1, 2023

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As the adage goes, when Wall Street holds a sale, nobody shows up. Sadly, as equities were bottoming in mid-June, folks on Main Street wanted no part of them. Indeed, the American Association of Individual Investors (AAII) saw its Bull-Bear Sentiment gauge tilted heavily toward pessimism on June 22, 2022, with that week’s Bearish extreme trailing only readings in the third trimester of 1990 (as a Gulf War was brewing) and March 5, 2009, just as stocks were putting in a major bottom during the Great Financial Crisis.

‘Twas ever thus, Al Frank, the founder of The Prudent Speculator, liked to say, as time and again traders end up zigging when they should have zagged. It is virtually impossible to successfully outguess the gyrations of a incredible fickle market, as the majority of investors usually feel better about the prospects for stocks AFTER they have gone up in price and worse AFTER they have gone down.

Not surprisingly, this emotional Buy High, Sell Low problem is why so many suffer mediocre to lousy returns on equities. Instead, I think those that share my long-term time horizon should be gravitating towards stocks of good companies when they are enduring short-term difficulties.

For example, the broad indexes have little to show for 2022, as the S&P 500 is still off more than 10% year-to-date, the Nasdaq composite index is down more than 15% and the Philadelphia Stock Exchange Semiconductor index is even further in the red. Fears over slowing demand for and excess inventory of semiconductors have led to a plunge in the latter group of stocks, even as President Biden signed the CHIPS and Science Act of 2022 last week, purportedly “boost[ing] American semiconductor research, development, and production.” And recent cautionary remarks by the CEOs of major industry players like Nvidia, Applied Materials
AMAT
and Analog Devices
ADI
have added fuel to the fire.

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True, stocks in the space have typically been highly cyclical, but chips are in just about everything these days, and for those that can view this type of volatility as a feature instead of a flaw, the future remains bright for several companies across the semiconductor value chain. Often getting much of the press are designers of processing chips like Advanced Micro Devices
AMD
, Nvidia or Qualcomm
QCOM
, but less glamorous companies like the makers of chips used in memory and storage equipment are also positioned to benefit from secular trends such as artificial intelligence (AI) and new server applications, which have significant computing power and storage needs.

The CEO of Micron Technology
MU
, Sanjay Mehrotra recently said that “a broadening of customer inventory adjustments” has led the firm to “expect lower industry bit demand growth for DRAM and NAND” (two key product categories), which will create a “challenging market environment in fiscal Q4 2022 and fiscal Q1 2023.” But it was just last month that Mr. Mehrotra pointed to AI, ongoing cloud adoption, electric vehicles (EVs) and the ubiquitous connectivity offered by 5G as “strong secular demand drivers, enabling the memory and storage industry to outpace the broader semiconductor industry.” He added that “Micron’s product portfolio has become significantly stronger, and we have established product momentum in several attractive growth markets.”

This reduction in near-term demand will also affect Lam Research
LRCX
, a manufacturer and designer of semiconductor processing equipment used to make integrated circuits. Weighted heavily towards memory manufacturers, the last few years have been terrific for Lam, which just a quarter ago generated the highest revenue in the firm’s history and $8.83 of EPS, crushing expectations of $7.26. Lam’s customers include Micron, but also chip-making leaders like Samsung and Taiwan Semiconductor.

A 33% ride southward like the shares of MU or LRCX have taken this year is never fun, but these stock price ups and downs aren’t foreign for the management teams of either company. Both companies maintain robust balance sheets with lots of cash, making their respective forward P/E multiples (between 12X and 13X NTM EPS) attractive while the rising device complexity ought to fuel demand for as far as the eye can see.

I would be greedy when others are fearful when it comes to Micron and Lam Research.

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