Fourth Quarter Turnovers Can be Costly

Just as the outcome of yesterday’s Super Bowl seesawed back and forth until the very last minute, tech companies dominated the headlines last week as Microsoft, Apple, and a host of other big names released quarterly earnings reports that pushed the market up and down before finishing the week with a loss. emerged as the shining star of the week, easily beating analysts’ expectations with its earnings announcement on Thursday that propelled its stock price up 10% the following morning.

But it was a particularly brutal stretch for Microsoft co-founder Paul Allen, who saw his personal fortune plunge as Microsoft stock declined from a high of $47.13 on Monday to a closing price of $40.40 on Friday for a loss of more than 14% (Allen reportedly still owns or controls 100 million shares of Microsoft via a network of trusts). Now the majority owner of the Seattle Seahawks, on Sunday he watched helplessly as his football team marched down the field towards a game-winning touchdown in the final seconds, only to lose the game on an interception at their opponent’s one yard line. I don’t care how much money you have, that hurts!

For the market as a whole the news was more bad than good, so all the major indexes drifted lower over the course of the week. The S&P 500 Index opened on Monday at 2050.42, but closed the week on Friday at 1994.99 for net loss of 2.8%. Likewise, the Dow Jones Industrial Average also dropped 2.8% while the tech-heavy NASDAQ Composite Index was off 2.4%. That marked the fourth consecutive week that the indexes moved in the opposite direction of the previous week.

Don’t be surprised to see this up and down pattern persist over the next several weeks as many more earnings reports are released. It’s not so much last year’s results that are driving the market now, but the “guidance” for 2015 expectations that analysts are focusing in on. What they don’t want to see is the year get off to a good start, only to have a rookie defensive back step in at the last second to spoil the outcome with a game changing interception.

Although the Super Bowl may be over, we have many more portfolio companies yet to report so we will continue to watch the scoreboard until the final whistle. In the meantime, here is a quick box score on how the reporting companies have fared so far.


Apple (AAPL) – Sales in China of its iPhone 6 were much better than expected, and comments regarding future revenue from Apple Pay and the Apple Watch later this year have whipped up new momentum for this All-Pro workhorse. Apple remains a buy, and we are raising our limit to $130. (AMZN) – Looks like Amazon got tired of watching Apple take home the winner’s trophy every year, so it cut expenses to prove that it can really make money when it wants to. If it can keep it up it may qualify for “Comeback Player of the Year”, but we suspect it will go back to its free-spending ways now that it has resurrected its share price for the time being. Don’t buy it; we still think it is grossly overvalued, especially after this latest run up.

Silicon Motion Tech (SIMO) – Rob DeFrancesco provides a complete scouting report on SIMO below, which is a strong contender for “Rookie of the Year” given it has gained 73% since we first recommended it on April 21st!


Microsoft (MSFT) – Lost 14% of its value in the days following its earnings announcement last week. The good news it is still up more than 10% for past twelve months, but the bad news is the company now has to go out and prove all over again that it can make the correct strategic decisions. It’s still a buy in our Investments Portfolio, but we are reducing the buy limit to $45 (from $48) until it proves it can stay on message the way Apple can.

Western Digital (WDC) – This is also a good news/bad news situation; its chart for the trailing twelve months shows higher highs and higher lows, but the swings are extreme from one cycle to the next. To wit, last April it peaked above $94 only to drop down to $80 six weeks later. Three months later it broke through $100, only to revisit $85 during the “Ebola correction” a month after that. In late December it crested above $114, but is now below $100. So, I can only surmise from its trading pattern that it will now head back up towards $130, only to pull back to $115 shortly thereafter. Even though it is an options trader’s dream, we still own it in our Investments Portfolio with a buy limit of $95.

Seagate Technologies (STX) – Unlike its rival Western Digital, Seagate has not seen an appreciable increase in its STR (Smart Tech Rating) despite its recent share price decline. We still have it as ‘Hold’ in our Investments Portfolio with a mediocre STR of 4.1, and a stop-loss limit of $55 which it is dangerously close to.

Qualcomm (QCOM) – The most frustrating of all our portfolio stocks, sort of like a physically talented quarterback who can never find the open receiver. Someone on its senior management team is probably going to take the fall for its latest gaffe, as the company is going nowhere while companies like Apple are grabbing gobs of market share in the Asian smartphone market. Qualcomm is also trading very close to its stop-loss price of $65.


AT&T (T) – Some veteran players consistently rack up solid stats but never seem to get enough credit and AT&T is beginning to look like that type of performer. If the dividend yield of 5.7% doesn’t excite you, then its forward PE ratio of 13 compared to its sector peer group average of 16 should generate some enthusiasm. Yes, it is a boring company in a boring business, just like London Fletcher was a boring linebacker who only started 215 consecutive games and made 2,000 combined tackles at one of the most punishing positions in football. We still like AT&T up to $39 in our Investments Portfolio.

Riverbed Tech (RVBD) – Riverbed beat its earnings estimate last Thursday and still barely budged in value. We first added Riverbed to our Equity Trades Portfolio fifteen months ago at a price of $17.08; it quickly rose above $20, but has basically gone nowhere for the past eight months. We’ll hang onto a while longer, but if the next earnings report doesn’t get it moving again then it may be time to trade it for something with more upside potential. We’re changing it to a ‘Hold’ for the time being.


It was only three weeks ago that we added Silicon Image (NSDQ: SIMG) to our Equity Trades portfolio, noting at the time that the company would make an attractive takeover target for Qualcomm. Well, it looks Lattice Semiconductor Corporation (NSDQ: LSCC) wasn’t willing to wait around until that happened, making a buyout offer last Tuesday at 7.30 per share, which amounts to a 20% premium over its closing price on January 12th when we first recommended it.

While we are always thrilled to book such a large gain in such a short period of time, it raises the question of what to do next? While we do not normally recommend buying the acquiring company in the midst of a transaction that has not yet been consummated, in this case we believe that our thesis regarding Silicon Image now transfers over to Lattice Semiconductor, so we are closing our position in SIMG and initiating a new position in LSCC in the STI Equity Trades Portfolio.

Buy Lattice Semiconductor Corp. up to $7.50

NASDAQ Composite Index:                                                                        

Friday, January 30 = 4,635.24                                                 

Trailing 12 months = + 12.3%                                        

Trailing 7 Days = – 2.9%                                       

Trailing 4 Weeks = – 1.7%

Next Wave Portfolio Update—Silicon Motion Technology

By Rob DeFrancesco

Shares of Silicon Motion Technology (SIMO) last week hit a new 52-week high of $28.99 after the company reported solid fourth quarter results and issued upbeat guidance.

In the December quarter, per-share earnings of 48 cents came in one cent above the consensus estimate on revenue of $80.5 million (up 53% year over year), vs. the consensus of $80.6 million.

Thanks mainly to strong sales of embedded multimedia card (eMMC) controllers and client solid-state drive (SSD) controllers, embedded storage product sales in the latest quarter advanced 70%, and now account for more than half of Silicon Motion’s total revenue.

Revenue from eMMC controllers alone accounts for 40% of total revenue. This business saw 2014 top-line growth of more than 50%, double the estimated market growth rate of 25%, indicating SiliconMotion is gaining share. The company now controls about 25% of the total eMMC controller market; its goal is to reach a 40% share by the end of this year.

The partnership with SK Hynix, the company’s largest eMMC controller customer, has never been stronger, said Silicon Motion CEO Wallace Kou on the latest earnings conference call. It helps that Silicon Motion counts all of the top 10 non-iOS smartphone OEMs as eMMC controller customers.

On the SSD side, the company has begun shipments of its SATA 3 client SSD controller to Micron and another NAND flash OEM. A storage OEM customer started shipping SSDs with this same controller to three global Tier-1 PC OEMs. Silicon Motion secured another SSD platform win for the SATA 3 controller at a NAND flash maker, bringing the total to four manufacturers now onboard.

Revenue last year for the SATA client controller business totaled $15 million. Everything is on track for this segment in 2015 to scale 3x to 4x, representing revenue of $45 million to $60 million, according to Kou.

For Q1, Silicon Motion sees revenue of $76.5 million to $80.5 million, vs. the consensus estimate of $76.9 million. Projected gross margin of 50% to 52% compares favorably to the long-term target of 50%. Even in the seasonally soft Q1, revenue from the eMMC controller business is expected to hold steady on a sequential basis.

For 2015, the company is calling for top-line growth in the 15% to 25% range (last year’s revenue of $289.3 million was up 28%), representing revenue of $332.7 million to $361.7 million, vs. the consensus estimate of $350.3 million. Gross margin is expected to come in between 49.5% and 51.5%.

Recently at $27.86, Silicon Motion shares trade at 13.7 times the 2015 consensus EPS estimate of $2.03, considerably below the expected earnings growth rate of 25%. The current Street-high EPS estimate for this year is $2.13.

Silicon Motion Technology remains a ‘Buy’ up to $25 in the Next Wave Portfolio.