Semiconductor Stocks, ETFs: Which Best Wealth-Builders?

Semiconductor Stocks, ETFs: Which Best Wealth-Builders?

Here is a broad investment attractiveness review of the competitors

This article has no fundamentals analysis content. All of that analysis has been done by the information gathering worldwide staffs of the Market-Making [MM] firms, instantaneously communicated to their HQ trade desk support staffs of experienced, qualified value analysts whose judgments are enriched by the block-trade desk’s minute-by-minute knowledge of what the (big) buy side of the Street is intent on accomplishing for their portfolios.

That input is used by the MMs’ arbitrageurs in negotiating hedging deals in the derivatives markets to protect the firm’s capital that usually gets involved in balancing buyer and seller appetites of the moment. It is that MM firm capital price protection insurance that reveals the knowledgeable expectations of coming securities prices.

The subjects of this securities comparison include profitable and not-so semiconductor developers in the quest to resolve many technological problems. Our concerns are only with the investment ones, not the tech challenges. The most promising investment competitors are CEVA, Inc. (NASDAQ:CEVA), Micron Technology Inc. (NASDAQ:MU), Monolithic Power Systems, Inc. (NASDAQ:MPWR) and Himax Technologies Inc. (NASDAQ:HIMX).

All materials from have been approved for this usage.

Here are Wednesday’s forecasts, and outcomes of prior like foresights

Figure 1

The Figure 1 table has two distinctive columnar parts and 4-row sections. The columns have investing relevance to all the rows. The row groups separate stocks from ETFs, from group aggregates, and from troubled issues.

The first 4 numeric data columns (B)-(E) are products of the analysis of current behavior of market professionals. Those columns and the one headed Range Index (G) report what that behavior implies about the current expectations of investment professionals for the likely range of stock or ETF prices in the coming 3-4 months.

The remaining columns report what actual market price activity produced when prior forecasts for each stock similar to those of today were used to manage investments under a common portfolio discipline. The Range Index column tells what percentage of each stock’s current forecast lies below the current market price. Under the Sample Size column heading, a count of the number of prior forecasts with Range Indexes like today’s is indicated at (L), along with the total number of all forecasts available from the past 5 years of market days (M).

Think about the credibility of the current forecasts in (E). The proportion of those similar prior forecasts that could produce a capital gain profit becomes a significant measure. It demonstrates the capability of the forecasters to be helpful to the wealth-building investor. Its proportion as a percent of the prior forecasts sample is in the column headed Win Odds (H).

The Win Odds has an important impact on the Realized Payoff column (I) next to it, where the average NET gains of all the prior forecasts in the sample are reported. These results include the actual losses taken under our standard portfolio management discipline TERMD, applied to all forecast situations.

TERMD sets the top of each implied price range forecast (B) as a sell target for that single forecast. When first reached within the next 3 months’ closing market price, that forecast position is closed so that the expanded capital can be immediately reinvested the following market day. If not reached in 3 months, the position is closed and reinvested, regardless of gain or loss.

The true Risk~Reward Tradeoff in each investment is between the upside forecast prospect of (E) to be pitted against actual prior worst-case downside price exposures experienced during TERMD holding periods. The flavor of the prospective reward carrot (E) gets muted by the worst-tasting next-column experience headed Maximum Drawdown (F).

That point is viewed as the most likely high-stress point to cause an untimely termination of the adventure. A termination then would be at the least productive, most damaging point. This is real risk, the actual loss of capital, not what is conventionally offered as risk in much investment education theory – the potential worry over UNCERTAINTY of REWARD, the volatility of BOTH higher and lower statistical deviation from some PAST AVERAGE of price change experiences.

Instead, committing to the discipline’s full 3-month time investment (but not beyond) might achieve potential recovery to profitability (if/when at an interim price below entry cost), perhaps even to reach the forecast sell target.

Between the target “cup” and the %Payoff “lip”, serious adjustments to commitment enthusiasms can (and usually may) occur. They are indicated by the column headed Cred.Ratio (N), where the Realized Payoff accomplishment (I) is contrasted with the %Upside Sell Target offering (E).

The more critical Reward~Risk comparison draws on the Win Odds (H) (and its complement 1 minus H as a %) to condition the Realized Payoff (I) and the Maximum Drawdown (F) as indicated in the Odds-Weighted columns (O) and (P).

Figure 1’s rows provide all these important dimensions issue by issue for the securities in question. They are accompanied by similar boldfaced measures of SPY to give a taste of “the market” as most frequently observed by the investing public.

Also included are comparisons of the subject stocks with a much broader population of over 2,700 stocks and ETFs as measured on this day. The population data often reveals overly optimistic sell targets and abysmal payoff results. In contrast, the population’s “top20” issues, ranked by their odds-weighted prior forecast histories, typically present annual rates of capital accumulation in the +75% to +90% range and even above.

Keeping Score

The wealth-building score is measured in Figure 1 by the portfolio’s compound annual growth rate (K), or CAGR. Each holding in a portfolio contributes its part, given the emphasis of capital commitment dedicated to it. Here, each available candidate is viewed as having an equal participation prospect on an all or none basis at this point in time and opportunity.

But CAGR is the meaningful standard. It makes the “speed” of wealth accumulation critical, because the efficient use of time provides a non-financial leverage in attaining the portfolio’s goals. Recognizing that time presents a powerful (pun intended) function in the CAGR equation’s calculation, an understanding of each investment candidate’s time investment is important. In the financial community, the “speed” of reward is measured in units of “basis points per day”. A basis point is 1/100th of one percent.

Under the portfolio management discipline of TERMD, the holding period times of capital commitment to various positions may be quite uneven. This is in contrast to the usual methods of measurement for portfolio performance, looking at all holdings during equal calendar periods. That style of measurement tends to encourage buy & hold investing strategies, which result in grossly inefficient capital utilization when the significant leverage of time is considered.

This kind of passive investment management behavior is a hangover of 20th century investing economics, when making holdings changes was quite expensive. At that time, serious opportunity for positive reward increments was required to justify the cost of making holdings changes. Payback periods measured in multiple months to years could often be encountered.

Advances in transaction technologies now present paybacks of days to hours, with trends spurred by incentives among competing service providers.

When measuring the attractiveness of investment candidates in a wealth-building mission environment, it makes sense to rank them by their demonstrated rates of capital accumulation. Figure 1 does that in their bp/day sequence, the last column on the right (R).

The ranking tends to favor stocks with recent favorable experience and degrade those with extended unfavorable market history. The potential for significant change in trend may encourage some investors to overstay positions or to make new investment choices with an investment losing its market-competitive edge. But it also impedes a too-eager repetition of falling-knife experiences where ultimate recovery may be reasonably expected.

Consider now the Figure 1 row identifications of specific securities and their arrangement in relevant groups.

At the top section of Figure 1 are the best single-stock investment securities, ranked by (R), their demonstrated speed of capital accumulation subsequent to prior forecasts at the Range Index proportions of upside to downside being seen today. A bold-faced average of these top stocks by columns is intended to make easier their comparison with three exchange-traded funds holding only several semiconductor stocks.

What should be evident from (E) and (F) is that the ETFs succeed in minimizing the downside exposures in their holdings to the average of the “good” semiconductor stocks. But this gets done at a cost of significantly reducing the average upside price expectations for the ETF securities from 14%+ of the stocks to 8% in the ETFs. It also chopped the achieved payoffs of the ETFs from +7% to +5.7%.

The three ETFs had much quicker achievement of their sell targets and higher overall Win Odds of 94, compared to the over two dozen “good” semiconductor stocks. Their average ranking (R) at 17+ bp/day doubles the stock group average but is only on a par with the top half-dozen and well under the best two.

Reward-to-Risk comparisons

A quicker visual presentation is seen in Figure 2, which portrays the overall semiconductor group in terms of the comparison between achieved past price gains and experienced price drawdowns during TERMD holding periods.

Figure 2

Upside price reward forecasts come from the behavioral analysis by Market-Makers [MMs] (of what they do right, not of errors) as they protect their at-risk capital from possible damaging future price moves. Their potential reward (best upside likely price change) forecasts are measured by the green horizontal scale.

The risk dimension is of actual-experience price drawdowns at their most extreme point, while being held in previous pursuit of upside rewards similar to the ones currently being seen. They are measured on the red vertical scale.

Both scales are of percent change from zero to 25%. Any stock whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line. Several are present in these first two figures.

The best reward-to-risk tradeoffs are to be found on these maps at the frontier of alternatives, down and to the right. In this Figure 1, these are starting with Texas Instruments (NYSE:TXN) at location [1] to Marvell Technology Group (NASDAQ:MRVL) at location [21]. CEVA’s fabless competitive advantage is evident in this tradeoff.

Odds and payoffs comparisons

Carrying through the scorekeeping provided above into a trade-off between the odds for profitable positions from prior forecasts like today’s, and their scale of profit, Figure 3 presents a map similarly oriented to Figure 2.

Figure 3

The orientation of this map is like that of the Reward~Risk Tradeoffs in Figure 2; good is down and to the right, not-so is up and to the left. Items in the white Payoffs area at left have achieved average Win Odds amounts less than 80 out of 100, and those in the extreme upper left corner, if any, also have had negative % payoffs from prior forecasts at current RI levels.


The two stocks which are essentially intellectual property renters, CEVA at [6] and HIMX at [9], are the big-payoff investment competition winners, with CEVA also having the Win Odds advantage due to limited forecast experiences (only two) at-present disproportional upside prospects. MU at [5] and MPWR at [11] are the more conventional semiconductor stock buy attractions.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CEVA over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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