Sunday, December 3, 2017

Semiconductor sector: quite a ride

Semiconductor stocks have had quite a ride in year 2017. Like a lot of technology stocks out there, also some semiconductor companies start to look expensive. However, not all of the chip stocks have challenging valuations.

Intel core i7-970 pin side
Image: Rainer Kn√§pper, Free Art License

I collected a bunch of well-known large cap chip stocks to the following table and sorted them by forward price per earnings ratio from lowest to highest:

Table. Comparison of selected semiconductor stocks (data source:

It has to be said that this is by no means an apple-to-apple comparison as these companies - while all having to do with semiconductors - are very different from each other. There are manufacturers of memory, central processing units (CPU), graphical processing units (GPU), digital signal procesing units (DSP), field programmable gate arrays (FPGA) etc.

Nvidia seems to be the hottest stock out of the selected ones with forward P/E exceeding 40. Market seems to expect great future for this GPU maker. I guess it has to do with new applications for GPUs like artificial intelligence (AI).

Micron on the other hand has the lowest valuations almost across the board. Only Western Digital has lower price to free cash flow (P/FCF). Memory business has been in the past quite volatile (swinging between oversupply/undersupply) so I guess that may be the reason for the market to take cautios view on e.g. Micron.

Qualcomm seems to have largest pile of cash relative to market gap (P/C), but free cash flow does not look so good. Taiwan Semiconductor Manufacturing Company and NXP Semiconductors N.V have good looking free cash flow (P/FCF). With regards to price per book (P/B) there seems to be many in range of 2-3 while Nvidia is flying far higher than anyone else at 18,77.

Our positions in this sector happen to be the top three companies in the list (lowest forward P/E): Micron, Western Digital and Intel. These companies make the basic building blocks of digital age. While they aren't remotely as hyped as Nvidia is, I believe they too are going to do well as the amount of data that each person generates and consumes is going to grow exponentially.

My first two computers didn't have a hard disk drive. I recall third had something like 30MB. Now "low end" of normal drives hovers around 1TB. That's 25000 times the amount I had in early 90's and likely costs a fraction of what I paid for my first drive back then even if adjusted for inflation. With work memory (RAM) the story is similar.

It does not stop here. Big data applications ("data lakes") in corporate world are already dealing with next level multiples (PB = 1000xTB and EB = 1000xPB). Eventually also individual consumers deal with petabytes (PB) worth of data.

Think VR. I don't think it really takes off until VR gear resolution is on human eye level. What we now know as TV may eventually change to a 360 field-of-view VR gear kind device allowing you to look freely around. That means huge amounts of graphics data to be stored and processed.

AI also needs massive datasets at the time when it's "taught" ("machine learning", "deep learning"). Use of AI is also going to enable analysis of vast amounts of data (think massive realtime automated video surveillance of major cities).

I often think of gold rush and how we may now be in same kind of situation with many technologies (like AI and VR). I do not really think about the people who went out to try to find gold, but the ones who figured out what to sell to those people.

Thursday, November 2, 2017

New turnaround bet: General Electric Company

It seems the only original component of  Dow Jones Industrial Average still trading today - General Electric Company (NYSE: GE) - is in trouble or atleast has fallen out of favor.

General Electric stock price chart taken during trading day on 2nd Nov 2017.
Chart courtesy of

It qualifies for a good turnaround bet for patient long term investor as the underlying business is in my opinion solid and extremely well diversified over several industries.

Originally I came up with this investment thesis after scanning well known large US companies in which insiders have been net buyers this year.

GE is a multinational conglomerate involved in multiple different industries. There has recently been change in top management and a lot is expected from new CEO. He is expected to lay out plan for "new GE" on November 13th in GE investor update event [link to related article].

One thing many commentators seem to be expecting is that GE will cut dividends. I buy their arguments and reasoning. It makes sense that the new CEO cleans all possible "tables" now. The company itself have announced already that it will divest more than $20B worth of assets in the next two years, which typically unlocks hidden value.

I initiated buying on the 8th consecutive loss day (today could end up being 9th). The plan is not to try to figure out where the bottom will be, but to continue purchases along the way (down or up) in near future.

Monday, October 30, 2017

Exit from Fred Olsen Energy

Today I decided to finalize our exit from Fred Olsen Energy (Oslo OSE: FOE), which has been in the portfolio since around 2010. This was last pure oil  & gas related stock in our portfolio.

Over the years the position was trimmed up- and downwards. It's safe to say without indepth calculations that the net effect of all trades and dividends has been negative to our portfolio.

The recent gains in the stock do not make any more sense to me than the previos spikes in the stock price during last few years. That is why I thought now is good time to exit.

The year 2017 started with 34,20 NOK price and the lowest valuation has been 8 NOK per share. Today the stock made 3 month high and climbed above 23 NOK. In contrast just 1,5 months ago it was trading under 10 NOK.

The fact is that the fleet will soon sit completely idle as Bideford Dolphin contract ends in early November 2017. The company reports that Bolette Dolphin is "hot stacked" and "contract opportunities are pursued aggressively". Rest of the units are "smart stacked" (3 units) or "preserved and maintained" (2 units).

The company had 688,9 million USD worth of non-current interest bearing debt and 190,9 million current interest bearing debt in end of Q3 2017. Cash and cash equivalents stood at 451,9 million USD.

I do hope they get new contracts soon despite exiting the stock!
They will need the cash flow to service the debt.

Sunday, September 10, 2017

Bull runs and crashes since 1999

Troughout the year I have been checking our performance against main indexes in U.S. and Europe. I have thought that we will do badly this year against our benchmark (MSCI All world country index or 'ACWI') until I actually checked out ACWI net performance this year in euros. Currently it's only slightly above year end 2016 level. Given continued bull run of broad U.S and European indexes in 2017, this seemed strange at first.

Then I checked dollar vs. euro and that partially explains what I am seeing.

USD to Euro in 2017 to date with 100 day moving average.
Chart courtesy of

Since I am measuring ACWI in euros decline of dollar against euro smoothes out bull run of dollar denominated investments.

Our market and currency exposure is heavily tilted to European markets and euro compared to ACWI being exposed much more heavily to U.S market and dollar. That's why falling dollar is tail wind for us.

If we look at the entire history of Euro (since its birth on 1.1.1999), we can see that euro had bull run from 2002 to 2008 which pushed dollar far from parity. Since 1.1.2009 dollar has climbed back towards parity, but not reaching it.

USD to Euro from 1.1.1999 to date with 100 week moving average.
Chart courtesy of

The bull run of both Nasdaq and Dow Jones indexes have been phenomenal from 2009 onwards. The crashes of 2000 and 2008 are clearly visible in the Nasdaq chart. Since 2000 was tech bubble it obviously does not show up in the DJ chart.

Nasdaq Composite index from 1.1.1999 to date with 100 week moving average.
Chart courtesy of

Dow Jones Industrial Average index from 1.1.1999 to date with 100 week moving average.
Chart courtesy of

Compare above two U.S indexes with Euro STOXX 600 index:

Euro Stoxx 600 index from 1.1.1999 to date with 100 week moving average.
Chart courtesy of

Quite a difference. It would be easy to jump into conclusion that European markets are still moderately priced in comparison to U.S markets that are far above their 2008 level. I am not going to do that just by looking at these charts.

Also, since our investments are either to individual companies or specific market segment ETFs the market as a whole isn't really meaningful yardstick. Outside of emerging markets, we do not invest via broad all-market-index tracking ETFs or other such instruments.

I am sure there are individual companies - especially within Nasdaq - that are priced sky high.

However, Looking at companies within our U.S portfolio (Micron, Intel, ..), I do not see alarming P/E or P/B levels when looking both at current and forward levels combined. Berkshire Hathaway is our highest priced investment in U.S. in terms of P/E and that's around 20, which is still fair valuation to that company in my opinion.

[ was used to check P/E and P/B levels]

Monday, July 31, 2017

On success as an investor

According to Peter Lynch (the legendary fund manager of Fidelity Magellan) the qualities related to success as an investor are:
  • patience
  • self-reliance
  • common sense
  • a tolerance for pain
  • open-mindedness
  • detachment
  • persistence
  • humility
  • flexibility
  • willingness to do independent research
  • willingness to admit mistakes
  • ability to ignore general panic

Out of the above list I think willingness to admit mistakes is the hardest. Acting on a mistake is actually even harder as this typically involves selling a stock at significant loss.

Over the 20+ years of investing I have gradually got better at avoiding mistakes. It is extremely rare to find a bargain selling at open market. Low P/E and P/B are typically there for a reason (look for them!). Same with very high yeild.

Out of the all "great ideas" I have had over the years very few have been actually great. I think roughly equal amount (if not more) have been in the exact opposite category. So I tend to be sceptical with regards to any "great idea" that I come up with.

Mistakes do happen when inveting directly into individual stocks as opposed to picking a safe ETF tracking sensible idex.

That's why adequate diversification is paramount.