Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

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It makes me wonder if the art of forecasting has been replaced by extrapolation of current states.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?

Stay informed, stay successful. Get your free two-week trial of the Buzz & Banter and get real-time information, observations and ideas from our Minyanville professors.

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.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos