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Will Xilinx and Seagate Head Higher?


Currently, these two companies are really generating much more EPS growth than revenue growth.

Contrary to some opinions (or many opinions), the technology sector is not yet dead. Some of the best current quarter earnings as well as outlooks will come from this sector. The stock prices have been treated like the fundamentals are quickly rolling over and as IBM (IBM), Xilinx (XLNX) and Seagate Technology (STX) all show, the fundamentals are not falling on the credit downgrades that Moody's keeps dishing out lower on a weakly basis. Speaking of Moody's, wouldn't these downgrades have been of more value before the current conditions were so obvious to see?

It makes me wonder if the art of forecasting has been replaced by extrapolation of current states. Anyway, I digress. Current fundamentals for many areas of tech are still quite strong, but again, it's not a huge leap to say that tech will indeed feel the pinch of a weaker global outlook. The question is will they see more or less of the impact?

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I think fundamentally they will see less of the impact. I've said this before but we are not in 2001-2002 when tech valuations had PE's in the 50's, 80's or even 150's. Then when those earnings went away the P/E's got higher and higher until they went NM (not meaningful).

Additionally, and most importantly, at what valuation level do many companies represent value on a "real" forward looking dynamic forecast, and not basing the forecast on the trend of the last few weeks?

A few weeks ago I thought stock picking was going to be ultra-important this year and it still may be for return maximization. However, with so many companies having suffered so much damage I think I'm not sure stock picking will be as important as just finding the companies that don't carry loads of intrinsic fundamental risk. So many tech names have ultra strong balance sheets, strong core franchises and even results that are strong and have totally been ignored.

XLNX is a great example and I like the stock quite a lot at current levels. It's a very strong leading company in its space, has a solid management team and its stock has been hammered. Their quarter wasn't a huge growth quarter but that wasn't expected. An honest forecast of their business shows multiple catalysts as new product cycles and new shifts in the semiconductor space look to be positives for them.

More importantly for XLNX and STX as well is that currently they are really generating much more EPS growth than revenue growth. This point hasn't been mentioned much at all. This fact is in sharp contrast to what we saw during the last major tech down cycle that ended in 2002. So if companies like XLNX and STX are producing EPS growth well in excess of modest revenue growth, what will these numbers look like in the future?

Lastly, even while P/E's and other metrics are demonstrating good value in this space, these metrics, especially P/E, ignore all the accounting changes that hit these names which have compressed valuations even more. The stock option back dating charges are the biggest issue. P/E's measured on the old standard, which was a GAAP approved standard, would have the current P/E's far below today's levels. Sarbox is a huge cost to many companies that didn't exist at the last tech bottom. I'm sure I'm missing others as well.

So that is why it's important to look at things like P/B, PSR's and Price to cash flow and net cash. Most of these metrics are showing this group to be cheaper on valuation basis than during 2002. And that was a great opportunity to buy stocks for large future gains.

So will XLNX or STX go up today? In this market, you can't say, but they both probably stand a very good chance of rising in the not too distant future. Also, we have reached levels on hundreds of stocks where the eventual upside is looking like it could be at multi-year if not multi-decade opportunity levels, given some time.

No positions in stocks mentioned.

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