I have posted my notes on this week's technology sector analyst conference calls and results:
Seagate
SGI
Microchip
I own Seagate (STX), which plunged after its report, but I believe that simply makes it more undervalued. Storage demand is still growing and Seagate is a cash cow with a healthy dividend.
I owned SGI (SGI) for years, but sold my remaining holdings today at $13.07 per share. I had bought these particular shares in May 2012 in two chunks for $6.69 and $5.27 per share. I will likely continue to cover SGI for a while and might buy back in if it looks like a turnaround with legs is in progress.
I also own Microchip (MCHP), which has been a stalwart of my stock portfolio. Lately Microchip has been growing substantially faster than the computer industry as a whole. It also pays a nice dividend.
Showing posts with label analysts. Show all posts
Showing posts with label analysts. Show all posts
Friday, January 31, 2014
Monday, February 21, 2011
Random Walks versus Purposeful Forays
The March 2011 Scientific American includes "Financial Flimflam" by Michael Shermer, subtitled "why economic experts' predictions fail". But it is not so much about economic predictions as about the theory that index funds are a better investment than managed funds. He claims the market average return in 2010 was 2.5% higher than the average of the ten largest managed funds.
Index funds, of course, have their own perils. A lot of people bailed out of their index funds some time in 2008 or early in 2009, as a sort of stop-loss measure. Then they missed the market runnups in later 2009 and in 2010. Thus gutting their retirements.
Since I do my own research and make my own investment decisions, and also get paid to do specific research and analysis by a fund manager, I think it is fair to wonder if I might be better off just buying into an index fund like so many other people and institutions.
Lately I have had an extraordinary rate of return because my portfolio contains only 15 stocks, and those include 3 with extraordinary returns of late: TTM, the Printed Circuit Board manufacturer; Dot Hill, a storage company, and Dendreon, the maker of Provenge for prostate cancer. In the past I have had other stocks hitting extraordinary returns, but because I have tried a number of risky, turn-around, small cap situations, I have also lost all the money I invested in 3 stocks over the past decade. There have also been times when my stocks lagged the market. Partly this is because since I typically play Nasdaq 100, or smaller, stocks, so they typically go down more in down markets, but up more in up markets.
I agree that if you are paying someone to manage your portfolio, they need to beat the market enough to pay their management fees and then some. Otherwise you could do better by creating your own index fund. It is not hard, you could for example buy equal amounts of the Dow 30 and the Nasdaq 100 or S&P 500 or any other known set of stocks.
Still, there are people like Warren Buffet who had very long runs of better than average returns. That is not just luck.
Large managed funds have trouble beating the market partly because they are the market. Their individual stock positions are so large that their creating or leaving a position, or even trimming, moves stock prices. They also tend to be in a relatively large number of stocks, which again dilutes their performance back towards the market average.
To beat the market it really helps to play on a small enough scale that your buys and sells don't affect the stock price substantially.
It also helps to see the curve. Here I mean seeing more than the statistics we all tend to rely on, revenue growth and earnings growth and margins and cash. You need to see future value where others are missing it. You also need to be very serious about weighing risk. Truth be told, I thought Dendreon was riskier than Anesiva, but Anesiva went down with my investment, while Dendreon took me up by a factor of ten. If both had sunk, I would be writing a far gloomier story today. Interestingly, in addition to stocks with high risk levels, I always keep stocks with good potential for returns and relatively lower risk. Some of those stocks have performed badly for me, but none went out of business.
I basically doubled my money in the stock market during a period of time when the market went basically no where. I balanced my risks and made my mistakes, and have been better at avoiding mistakes lately. In retrospect, or course, I could have put every penny I had into Dendreon, but that did not look wise at the time. Backtesting is interesting, but you have to go with what you know in reality, at the time of investment.
On the other hand I do an enormous amount of research, considering the size of my portfolio. I don't just invest in biotechnology stocks; I study biology text books and journal articles. I don't just invest in computer technology, I do my best to keep up with the breadth of its developments. Also, I try to think like an owner of the companies I invest in. I like companies that invest wisely in the future and run a tight ship.
Frankly, unless you enjoy doing research, you are better off in an index fund. But if you are willing to do your homework (and it really is a lot of homework), you have a good chance of beating an index fund if you are an astute individual investor.
You should check out the Scientific American article because it has some other information, especially about investor psychology. I love this bit: "Being deeply knowledgeable on one subject narrows focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation."
Above all, a smart investor looks most closely at the data that challenges current beliefs.
If you aren't familiar with it, see the Random Walk Hypothesis at Wikipedia.
Keep Diversified!
Index funds, of course, have their own perils. A lot of people bailed out of their index funds some time in 2008 or early in 2009, as a sort of stop-loss measure. Then they missed the market runnups in later 2009 and in 2010. Thus gutting their retirements.
Since I do my own research and make my own investment decisions, and also get paid to do specific research and analysis by a fund manager, I think it is fair to wonder if I might be better off just buying into an index fund like so many other people and institutions.
Lately I have had an extraordinary rate of return because my portfolio contains only 15 stocks, and those include 3 with extraordinary returns of late: TTM, the Printed Circuit Board manufacturer; Dot Hill, a storage company, and Dendreon, the maker of Provenge for prostate cancer. In the past I have had other stocks hitting extraordinary returns, but because I have tried a number of risky, turn-around, small cap situations, I have also lost all the money I invested in 3 stocks over the past decade. There have also been times when my stocks lagged the market. Partly this is because since I typically play Nasdaq 100, or smaller, stocks, so they typically go down more in down markets, but up more in up markets.
I agree that if you are paying someone to manage your portfolio, they need to beat the market enough to pay their management fees and then some. Otherwise you could do better by creating your own index fund. It is not hard, you could for example buy equal amounts of the Dow 30 and the Nasdaq 100 or S&P 500 or any other known set of stocks.
Still, there are people like Warren Buffet who had very long runs of better than average returns. That is not just luck.
Large managed funds have trouble beating the market partly because they are the market. Their individual stock positions are so large that their creating or leaving a position, or even trimming, moves stock prices. They also tend to be in a relatively large number of stocks, which again dilutes their performance back towards the market average.
To beat the market it really helps to play on a small enough scale that your buys and sells don't affect the stock price substantially.
It also helps to see the curve. Here I mean seeing more than the statistics we all tend to rely on, revenue growth and earnings growth and margins and cash. You need to see future value where others are missing it. You also need to be very serious about weighing risk. Truth be told, I thought Dendreon was riskier than Anesiva, but Anesiva went down with my investment, while Dendreon took me up by a factor of ten. If both had sunk, I would be writing a far gloomier story today. Interestingly, in addition to stocks with high risk levels, I always keep stocks with good potential for returns and relatively lower risk. Some of those stocks have performed badly for me, but none went out of business.
I basically doubled my money in the stock market during a period of time when the market went basically no where. I balanced my risks and made my mistakes, and have been better at avoiding mistakes lately. In retrospect, or course, I could have put every penny I had into Dendreon, but that did not look wise at the time. Backtesting is interesting, but you have to go with what you know in reality, at the time of investment.
On the other hand I do an enormous amount of research, considering the size of my portfolio. I don't just invest in biotechnology stocks; I study biology text books and journal articles. I don't just invest in computer technology, I do my best to keep up with the breadth of its developments. Also, I try to think like an owner of the companies I invest in. I like companies that invest wisely in the future and run a tight ship.
Frankly, unless you enjoy doing research, you are better off in an index fund. But if you are willing to do your homework (and it really is a lot of homework), you have a good chance of beating an index fund if you are an astute individual investor.
You should check out the Scientific American article because it has some other information, especially about investor psychology. I love this bit: "Being deeply knowledgeable on one subject narrows focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation."
Above all, a smart investor looks most closely at the data that challenges current beliefs.
If you aren't familiar with it, see the Random Walk Hypothesis at Wikipedia.
Keep Diversified!
Tuesday, November 9, 2010
AMD Ships First APUs on Analyst Day
Computer chip maker AMD announced it began shipping its new APUs (Advanced Processing Units) to computer makers this morning from its Singapore plant. At its analyst day presentation AMD executives described and demonstrated the APUs, which combine an advanced CPU (general purpose computer processing unit) with an advanced GPU (graphics processing unit) on a single chip.
Emphasizing what a groundbreaking point has been reached, CEO Dirk Meyer held up a typical sized CPU and then a mid-range GPU card, which was about the size of a small paperback book. Then he held up the APU that will have the equivalent CPU and GPU computing power. It was smaller than the CPU chip, about the size of a postage stamp. I know that the GPU card contains not only a GPU chip but memory, a fan, and connections for video output, so the comparison was a bit of an exageration. But it is a sort of computing grail achievement that goes beyond mere size comparisons.
Of course, knowing AMD has been working for years to achieve this feat, much larger rival Intel has announced that it will also have an integrated cpu/gpu product release for 2011. AMD executives mocked it, as well they might. We know it is an inferior product. It supports a graphics standard called DX10, which is now four years old. AMD supports DX11. It is true that most older software and games can't take advantage of DX11.
But many games already can, and most graphics software updates are moving to DX11. So Intel will be making an offering that can't cope with new games or software. When you buy a new computer, it is often because you want to take advantage of new software. Intel will be leaving consumers in the lurch.
Nevertheless, Intel is the Goliath, and AMD's previous attempts to take on the giant have had mixed results. Intel's profits are usually higher than AMD's revenues, and Intel spends way more on R&D than AMD. A few years ago Intel was so far behind in graphics, it is remarkable that they are maybe only 2 years behind now.
Intel will heavily outspend AMD in marketing, and will omit to tell consumers that its chips can't run DX11. So for AMD to take a lot of market share in 2011, it has to get its story out. In my experience retailers are more interested in Intel advertising subsidies than in making sure consumers make an informed choice between computers based on AMD and Intel. I would hope that tech "geniuses" would tell show off their stuff by telling the public to choose AMD if they want good graphics and video capabilities. But it seems that a lot of technology mavens are employed by Intel and Apple.
If the word does get out that Intel cpu/gpu combination chips are not good enough, AMD's ability to take market share could become capacity constrained. Intel has a huge production capability to match its market share; AMD's capacity can only be expanded so much in the short run.
Still, even a 10% increase in revenues for AMD in 2011, with maybe a 1% increase in market share, would be a boon for AMD.
Watch this space closely. The actual computers will start being available to the public in January, traditionally a slow period for computer sales. Public acceptance of the new AMD products, or resistance to Intel advertising, should be knowable by March or so, and act as a predictor for the remainder of the year.
For investors a key element will be margins. AMD believes that with the new processors (and server chips introduced in 2010) it can improve its non-GAAP gross margin from about 40% for 2010 to about 44% to 48% in 2011. If that turns out to be true (if Intel does not start a price war), then earnings will rise nicely and AMD will be in an even better position to compete with Intel in 2012.
Dirk Meyer showed an HP thin light notebook running gaming level graphics using the new APU chips. He claimed it could run 8 to 10 hours on one battery charge, and would cost less than $600. I want one, and it would work a lot better for me than a smaller form factor tablet computer. This ability to reduce power consumption is being introduced across the range of new AMD products in 2011: for netbooks, notebooks, desktops, and servers. That is good news.
Emphasizing what a groundbreaking point has been reached, CEO Dirk Meyer held up a typical sized CPU and then a mid-range GPU card, which was about the size of a small paperback book. Then he held up the APU that will have the equivalent CPU and GPU computing power. It was smaller than the CPU chip, about the size of a postage stamp. I know that the GPU card contains not only a GPU chip but memory, a fan, and connections for video output, so the comparison was a bit of an exageration. But it is a sort of computing grail achievement that goes beyond mere size comparisons.
Of course, knowing AMD has been working for years to achieve this feat, much larger rival Intel has announced that it will also have an integrated cpu/gpu product release for 2011. AMD executives mocked it, as well they might. We know it is an inferior product. It supports a graphics standard called DX10, which is now four years old. AMD supports DX11. It is true that most older software and games can't take advantage of DX11.
But many games already can, and most graphics software updates are moving to DX11. So Intel will be making an offering that can't cope with new games or software. When you buy a new computer, it is often because you want to take advantage of new software. Intel will be leaving consumers in the lurch.
Nevertheless, Intel is the Goliath, and AMD's previous attempts to take on the giant have had mixed results. Intel's profits are usually higher than AMD's revenues, and Intel spends way more on R&D than AMD. A few years ago Intel was so far behind in graphics, it is remarkable that they are maybe only 2 years behind now.
Intel will heavily outspend AMD in marketing, and will omit to tell consumers that its chips can't run DX11. So for AMD to take a lot of market share in 2011, it has to get its story out. In my experience retailers are more interested in Intel advertising subsidies than in making sure consumers make an informed choice between computers based on AMD and Intel. I would hope that tech "geniuses" would tell show off their stuff by telling the public to choose AMD if they want good graphics and video capabilities. But it seems that a lot of technology mavens are employed by Intel and Apple.
If the word does get out that Intel cpu/gpu combination chips are not good enough, AMD's ability to take market share could become capacity constrained. Intel has a huge production capability to match its market share; AMD's capacity can only be expanded so much in the short run.
Still, even a 10% increase in revenues for AMD in 2011, with maybe a 1% increase in market share, would be a boon for AMD.
Watch this space closely. The actual computers will start being available to the public in January, traditionally a slow period for computer sales. Public acceptance of the new AMD products, or resistance to Intel advertising, should be knowable by March or so, and act as a predictor for the remainder of the year.
For investors a key element will be margins. AMD believes that with the new processors (and server chips introduced in 2010) it can improve its non-GAAP gross margin from about 40% for 2010 to about 44% to 48% in 2011. If that turns out to be true (if Intel does not start a price war), then earnings will rise nicely and AMD will be in an even better position to compete with Intel in 2012.
Dirk Meyer showed an HP thin light notebook running gaming level graphics using the new APU chips. He claimed it could run 8 to 10 hours on one battery charge, and would cost less than $600. I want one, and it would work a lot better for me than a smaller form factor tablet computer. This ability to reduce power consumption is being introduced across the range of new AMD products in 2011: for netbooks, notebooks, desktops, and servers. That is good news.
Wednesday, October 6, 2010
Marvell Rumors: Hard Drives, RIM PlayBook
If you own a hard drive, odds are better than even that it has a Marvell Technology Group chip running it. In fact Marvell is a key supplier of many semiconductor devices that go into cell phones, wireless and hardwired networking equipment, and printers.
When Marvell's stock price began to slump yesterday (it closed Monday at $17.21, closed Tuesday at $16.89, down almost 2%), on a day the rest of the market was booming upward, I figured it was because of concerns about the hard disk drive (HDD) business. Reports from the field are that notebook sales are off, as 2 million consumers a month buy iPad tablets instead of refreshing their older notebooks. Less notebook computers means less hard drives, and PC sales in general have not been robust so far this year.
But no, a rumor was floating around, apparently originating with a noted Wall Street analyst, Ashok Kumar of Rodman & Renshaw, that RIM had dumped MRVL for TI for its processor for the PlayBook tablet computer. The rumor made some sense but had some obvious problems too. All stories I found on the net had the same origin, but many managed to deviate from the original, one even calling the RIM PlayBook the BlackPad (RIM is best known for its BlackBerry devices).
Executives of listed corporations are not supposed to give individual analysts market moving news. They are supposed to give all analysts and investors any market-moving news at the same time, usually by a press release or a public conference call. But analysts do all kinds of things to try to figure out what is going to happen before it is announced. I know I do. When I heard the RIM PlayBook announced, I looked to see who made the processor. No answer, but it was an ARM-based processor. As a Marvell investor I hoped my company would have a win, and many other commentators thought that was a good guess.
But RIM and their partners kept the design a secret, so in fact no one should have assumed Marvell won design-in. There are lots of uber-competent ARM-based processor makers to choose from.
So far there has been no confirmation from Marvell, RIM, or TI of the story. Which means it may not be true. Analysts like to have sources in or near companies. We like to ask questions to one company that will give us insight into the financial future of other companies. TI may very well have a design win at RIM, but it may not have ever been a socket Marvell had already won.
Let's look at the rumor as stated. The PlayBook release has been delayed; that much is known true. That would mean there are development problems. Kumar is alleged to have said the QNX OS for the device had problems, and the Marvell Armada chip for the device had bugs.
Let's see, Marvell chips work fine on BlackBerry phones already, and they work fine on Android phones. So was this a new, as yet untested chip that was buggy? Or was it just hard to integrate with the new QNX OS system? That is a classic engineering problem, with the software guys blaming hardware, and the hardware guys blaming software. If there was a Marvell chip screw up, was it really the chip, or was the incompetence on the RIM team? And why would a TI chip, also based on the same ARM design, work right off with QNX? Is it easier to fix known, discovered bugs, or to start over with a new chip? Usually, it is easier to fix the known bugs. And usually you don't change the processor, because that would require a lot more work than changing the OS to work around the processor's capabilities.
One way a possibly partly true, but obviously flawed, rumor can happen is through the third party. TI guy says to a friend, we got a RIM contract! Friend digs deeper, just a purely tech conversation, and speculation is RIM had some problem with QNX, and Marvell was the team to beat. By the time Friend, who is a regular supplier of tech information, talks to Kumar, the story makes sense, but may not be factually based. Kumar tries to verify the story, but if RIM, TI, or MRVL tells him, they are violating confidentiality contracts and SEC rules, so they don't comment. Kumar goes with his story. If he's right, he's a genius. If he is wrong, the squirrels will forget it soon enough.
At some point an official announcement may be made. Other than that, I'll have to wait until one of my friends gets a PlayBook and pops it open to see what chips are inside.
More data:
Marvell site
My Marvell Technology (MRVL) page
Marvell fiscal Q2 2010 results release
When Marvell's stock price began to slump yesterday (it closed Monday at $17.21, closed Tuesday at $16.89, down almost 2%), on a day the rest of the market was booming upward, I figured it was because of concerns about the hard disk drive (HDD) business. Reports from the field are that notebook sales are off, as 2 million consumers a month buy iPad tablets instead of refreshing their older notebooks. Less notebook computers means less hard drives, and PC sales in general have not been robust so far this year.
But no, a rumor was floating around, apparently originating with a noted Wall Street analyst, Ashok Kumar of Rodman & Renshaw, that RIM had dumped MRVL for TI for its processor for the PlayBook tablet computer. The rumor made some sense but had some obvious problems too. All stories I found on the net had the same origin, but many managed to deviate from the original, one even calling the RIM PlayBook the BlackPad (RIM is best known for its BlackBerry devices).
Executives of listed corporations are not supposed to give individual analysts market moving news. They are supposed to give all analysts and investors any market-moving news at the same time, usually by a press release or a public conference call. But analysts do all kinds of things to try to figure out what is going to happen before it is announced. I know I do. When I heard the RIM PlayBook announced, I looked to see who made the processor. No answer, but it was an ARM-based processor. As a Marvell investor I hoped my company would have a win, and many other commentators thought that was a good guess.
But RIM and their partners kept the design a secret, so in fact no one should have assumed Marvell won design-in. There are lots of uber-competent ARM-based processor makers to choose from.
So far there has been no confirmation from Marvell, RIM, or TI of the story. Which means it may not be true. Analysts like to have sources in or near companies. We like to ask questions to one company that will give us insight into the financial future of other companies. TI may very well have a design win at RIM, but it may not have ever been a socket Marvell had already won.
Let's look at the rumor as stated. The PlayBook release has been delayed; that much is known true. That would mean there are development problems. Kumar is alleged to have said the QNX OS for the device had problems, and the Marvell Armada chip for the device had bugs.
Let's see, Marvell chips work fine on BlackBerry phones already, and they work fine on Android phones. So was this a new, as yet untested chip that was buggy? Or was it just hard to integrate with the new QNX OS system? That is a classic engineering problem, with the software guys blaming hardware, and the hardware guys blaming software. If there was a Marvell chip screw up, was it really the chip, or was the incompetence on the RIM team? And why would a TI chip, also based on the same ARM design, work right off with QNX? Is it easier to fix known, discovered bugs, or to start over with a new chip? Usually, it is easier to fix the known bugs. And usually you don't change the processor, because that would require a lot more work than changing the OS to work around the processor's capabilities.
One way a possibly partly true, but obviously flawed, rumor can happen is through the third party. TI guy says to a friend, we got a RIM contract! Friend digs deeper, just a purely tech conversation, and speculation is RIM had some problem with QNX, and Marvell was the team to beat. By the time Friend, who is a regular supplier of tech information, talks to Kumar, the story makes sense, but may not be factually based. Kumar tries to verify the story, but if RIM, TI, or MRVL tells him, they are violating confidentiality contracts and SEC rules, so they don't comment. Kumar goes with his story. If he's right, he's a genius. If he is wrong, the squirrels will forget it soon enough.
At some point an official announcement may be made. Other than that, I'll have to wait until one of my friends gets a PlayBook and pops it open to see what chips are inside.
More data:
Marvell site
My Marvell Technology (MRVL) page
Marvell fiscal Q2 2010 results release
Tuesday, August 26, 2008
Marvell Downgrade, Round Two (or, Analyst Bull)
This column is not called Dissecting the Bull for no reason.
In this entry I am going to dissect games sell-side analysts play, using today's downgrade of Marvell Technology (MRVL) by Jefferies as an example. The stock price plunged 7% so far today. Marvell is about to hold its analyst conference for the quarter ending August 2, 2008 this Thursday, August 28th.
This looks suspiciously like events the week before the last Marvell analyst conference. See my Marvell Reality Tops Goldman Downgrade to make a comparision, and my summary of the fiscal Q2 2009 Marvell Technology analyst conference for real information.
This does not mean that I know that Jefferies is wrong in this particular case. Rather I want to put this and all analyst upgrades and downgrades into a broad perspective.
First, for those who don't know me, a reminder of my credentials and possible biases. I work freelance as a buy-side analyst for an investment management company. I also do a variety of things for technology companies, let's just call it consulting. I also am developing a web-based business that will be beta-testing soon. This year my only paying tech client has been Microsoft, but that is just a coincidence. I was asked to do a job for Cisco, but refused it due to a scheduling conflict. I also have investments in the stock market, including Marvell. That's why I noticed the price drop today.
Buy-side analysts are under pressure to give an accurate picture of reality for their clients, who are investors. Publicized upgrades and downgrades come from sell-side analysts. Their job should be to give their ultimate clients, individual and institutional investors who follow their advice, an accurate picture of reality. Sell-side analysts are paid by their employers, who are investment banks and brokerage houses. Their employers make money two ways: from their own speculation, and from fees, including trading fees. Generating fees requires getting clients to trade. Upgrades and downgrades induce clients to trade and generate fees. In addition, the tempatation to use the upgrade/downgrade for an internal trading edge, or to give priviledged clients an edge, is always present.
That said, the vast majority of buy-side analysts do their jobs in as honest of a fashion as they are able. Some are better at analysis than others, but that is just human nature. I've been very impressed by some of the sell-side analysts I know through participating in analyst conferences.
Now take a look at varying types of downgrades (flip them for upgrade equivalents). The most common kind is news-based. Usually a company says it had lower than expected revenues, or had some kind of foul-up, and says it to the public. Analysts issue downgrades. You don't need the analysts for that, so you can trust them.
Sometimes, using actual research, a particular analyst will come up with something no other analyst has, at least at first. The woman who picked Enron apart is a good example. Unfortunately, chance playing the role it does, sometimes even this does not help investors much. These downgrades are often difficult to verify independently, until it is too late. Sometimes a plus on the other side of the balance books, perhaps a client making an unusually large order, makes the analysis less important than it would be if all other things were equal.
Finally, we have the Hail Mary downgrade, which could be a cover for just getting clients to sell some stocks to generate commissions. In a time of economic turmoil, these are a good bet for analysts, because something could have already gone wrong, or could go wrong in the near future, so if you are right you look like a genius. There is always some sort of cover story, that makes it look like it is based on actual research. Often these downgrades just look past the truly predictable event horizon and lower earnings estimates for a year from now by a few pennies.
The problem for investors, of course, is that it is difficult to sort out the types of downgrades. Failure to believe a downgrade, when it has a real basis, can be quite dangerous.
At the Marvell analyst conference this Thursday (I'll have a summary [Marvell August 28, 2008 analyst conference] posted soon after it is over) questions will be asked, and Marvell management will give its answers. Could Marvell be hurt by the economic downshift? Sure, it has many large clients. A downturn in a client's business would effect Marvell. But I would not bet against Marvell at this point. I would not want to be any company competing against Marvell head-to-head. Marvell is ultracompetive and has crushed its competition repeatedly. It is in the process of entering several new fields, and seems to be preparing to repeat its history of success. Most notably in the past 2 years it acquired a money-losing division of Intel and turned it into a money maker.
Short term players have no choice but to panic when an upgrade or downgrade goes against their short term bets. Long term players can stick with their basic analysis and change it when real news warrants that.
Keep diversified!
More data:
My Marvell page
www.marvell.com
In this entry I am going to dissect games sell-side analysts play, using today's downgrade of Marvell Technology (MRVL) by Jefferies as an example. The stock price plunged 7% so far today. Marvell is about to hold its analyst conference for the quarter ending August 2, 2008 this Thursday, August 28th.
This looks suspiciously like events the week before the last Marvell analyst conference. See my Marvell Reality Tops Goldman Downgrade to make a comparision, and my summary of the fiscal Q2 2009 Marvell Technology analyst conference for real information.
This does not mean that I know that Jefferies is wrong in this particular case. Rather I want to put this and all analyst upgrades and downgrades into a broad perspective.
First, for those who don't know me, a reminder of my credentials and possible biases. I work freelance as a buy-side analyst for an investment management company. I also do a variety of things for technology companies, let's just call it consulting. I also am developing a web-based business that will be beta-testing soon. This year my only paying tech client has been Microsoft, but that is just a coincidence. I was asked to do a job for Cisco, but refused it due to a scheduling conflict. I also have investments in the stock market, including Marvell. That's why I noticed the price drop today.
Buy-side analysts are under pressure to give an accurate picture of reality for their clients, who are investors. Publicized upgrades and downgrades come from sell-side analysts. Their job should be to give their ultimate clients, individual and institutional investors who follow their advice, an accurate picture of reality. Sell-side analysts are paid by their employers, who are investment banks and brokerage houses. Their employers make money two ways: from their own speculation, and from fees, including trading fees. Generating fees requires getting clients to trade. Upgrades and downgrades induce clients to trade and generate fees. In addition, the tempatation to use the upgrade/downgrade for an internal trading edge, or to give priviledged clients an edge, is always present.
That said, the vast majority of buy-side analysts do their jobs in as honest of a fashion as they are able. Some are better at analysis than others, but that is just human nature. I've been very impressed by some of the sell-side analysts I know through participating in analyst conferences.
Now take a look at varying types of downgrades (flip them for upgrade equivalents). The most common kind is news-based. Usually a company says it had lower than expected revenues, or had some kind of foul-up, and says it to the public. Analysts issue downgrades. You don't need the analysts for that, so you can trust them.
Sometimes, using actual research, a particular analyst will come up with something no other analyst has, at least at first. The woman who picked Enron apart is a good example. Unfortunately, chance playing the role it does, sometimes even this does not help investors much. These downgrades are often difficult to verify independently, until it is too late. Sometimes a plus on the other side of the balance books, perhaps a client making an unusually large order, makes the analysis less important than it would be if all other things were equal.
Finally, we have the Hail Mary downgrade, which could be a cover for just getting clients to sell some stocks to generate commissions. In a time of economic turmoil, these are a good bet for analysts, because something could have already gone wrong, or could go wrong in the near future, so if you are right you look like a genius. There is always some sort of cover story, that makes it look like it is based on actual research. Often these downgrades just look past the truly predictable event horizon and lower earnings estimates for a year from now by a few pennies.
The problem for investors, of course, is that it is difficult to sort out the types of downgrades. Failure to believe a downgrade, when it has a real basis, can be quite dangerous.
At the Marvell analyst conference this Thursday (I'll have a summary [Marvell August 28, 2008 analyst conference] posted soon after it is over) questions will be asked, and Marvell management will give its answers. Could Marvell be hurt by the economic downshift? Sure, it has many large clients. A downturn in a client's business would effect Marvell. But I would not bet against Marvell at this point. I would not want to be any company competing against Marvell head-to-head. Marvell is ultracompetive and has crushed its competition repeatedly. It is in the process of entering several new fields, and seems to be preparing to repeat its history of success. Most notably in the past 2 years it acquired a money-losing division of Intel and turned it into a money maker.
Short term players have no choice but to panic when an upgrade or downgrade goes against their short term bets. Long term players can stick with their basic analysis and change it when real news warrants that.
Keep diversified!
More data:
My Marvell page
www.marvell.com
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