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Yoyo Stocks Give Investors A Rough Ride

In a bad year for compound semiconductor chip stocks in general, more than half of our portfolio of prominent companies have shed an alarming third of their value. But, reports Michael Hatcher, it wasn't all doom and gloom &ndash and, for a change, the star performer this year was an epitaxial equipment vendor, Germany's Aixtron.
What a difference a year makes – in our June 2006 survey, the stock prices of almost every single publicly owned company involved in compound semiconductors was on a high. Eleven out of our 20 performers had more than doubled in value in the preceding 12 months. Since then, the situation has nearly reversed, with only three of those 20 firms registering any kind of gain over the past year.

Our comparison may be a little bit unfair – mid-2006 turned out to be the point at which many of the rallying tech stocks peaked.

But such are the risks of playing the stock market. The bemusing paradox is that, while stock prices have been on the slide, market conditions and individual company performances have undoubtedly improved over the past year, with many posting record-breaking figures. Why is this? The problem is one of perceived risk, and at the moment there seem to be a number of risk factors associated – however loosely – with compound semiconductor stocks.



That negative sentiment does not seem to have spread across all technology stocks, however, with significant gains in the past year for key companies like Nokia, Intel, HP and IBM. Meanwhile, an underperforming Motorola has bombed, which would have impacted on many of the US GaAs manufacturers.

But, just because a company has a healthy top and bottom-line financial performance and exposure to the biggest clients in its market, it does not necessarily make for a good short-term investment.



RF Micro Devices is a prime example. The biggest GaAs chip manufacturer in the world for RF applications – bar none – RFMD has just enjoyed a record-breaking year in which it not only posted revenues of over $1 billion for the first time, but also registered a best-ever net profit of $83.4 million (see figure). Market analyst Strategy Analytics reckons that the Greensboro-based firm is further tightening its already strong grip on the power amplifier business. So, what s not to like about RFMD?

The share price: down 32% in the past year. And that s in a record-breaking year. Even taking into account, as noted above, that our May 2006 baseline could be somewhat anomalous, the past year has seen minimal gain. But look back over the past two years, and between May 2005 and May 2007 RFMD s stock actually notched up a very healthy increase of 64%.

The more recent dip in RFMD s stock price seems to be rooted in a number of factors. Of the major phone manufacturers, Nokia and Samsung seem to be firing on all cylinders, but Motorola s well-publicized problems have clogged up the sales channel and resulted in a build-up of inventory. Combine that with a general concern over future consumer spending patterns, as well as a school of thought suggesting that RFMD will have to face growing competition from suppliers of single-chip transceivers, and perhaps a drag on its shares is not such a great surprise.

But still, here s the rub: how do you go about investing in stock like RFMD? We know that it s a well-run, innovative, market-leading company, performing at the top of its game. But it s stock price is about as predictable as British weather.
Takeover talk

One compound semiconductor company s stock price has outperformed the rest of our portfolio by a huge margin over the past year, however – the value of German MOCVD equipment vendor Aixtron has rocketed by almost 80% from May 2006 to May 2007.

How much of that increase is due to business conditions and performance, and how much is due to takeover speculation is difficult to tell. Aixtron s share value spiked in mid-April when seemingly unfounded rumors of a potential takeover bid took hold on the Frankfurt stock exchange. What actually seems to have happened is that Aixtron s rising share price crossed an arbitrary threshold that gave the company a higher profile among the investor community, and combined with a more general increase in merger and acquisition activity in Germany to fuel a further surge.

Undeniably, market conditions have been good for both Aixtron and its chief MOCVD equipment rival, Veeco Instruments. Both companies are racking up big sales figures and filling their order books as LED producers upgrade their chip manufacturing capacities. Aixtron has just posted best-ever quarterly revenues of €63.8 million ($86.3 million), double the figure seen in the previous year, and a very healthy profit of €7.6 million. While Veeco s share price has not followed the same trajectory as Aixtron s, its combined orders for MOCVD and MBE equipment now represent the US company s single largest market sector for the first time since it acquired Emcore s TurboDisc division.

Emcore itself has endured a torrid year on the stock market. That s despite what appears to have been a thoroughly successful re-focusing of the company over the past year. Now very much aligned with the photovoltaics and fiber-optic sectors, from chip production through to systems, Emcore was one of our top performers in last year s survey. But it spiralled down from a long-time high of more than $12 back in May 2006 to around $5 over the past year, during which time it was also hurt by an investigation into backdating of stock options. That investigation hasn t just affected Emcore s reputation – a historical review of those awards also cost the company $2 million in the latest quarter.

LED manufacturer Cree also continues to have a tough time on the stock market, with its value having slumped 20% over the past two years. The Durham-based company is also in the middle of a strategic transformation, but seems to suffering from serious competition in the HB-LED space. Cree is keenly promoting the solid-state lighting "revolution", which CEO Chuck Swoboda described at the recent Piper Jaffray Semiconductor and Communications conference in New York as "really starting to happen". Investors don t seem to be quite convinced of that just yet, but the company s acquisition of COTCO should be a big help – giving Cree exposure to the Chinese market, which is far more tuned in to the advantages of LED-based lighting than the US.

Back at the top of our leaderboard, there s no doubt about which company has been the most consistent stock-market performer over the past two years. Anadigics value has admittedly slipped back a little since hitting a long-time high of nearly $14 in recent months, but is still trading at more than six times its May 2005 level. Although the company is yet to register a really significant net profit, it seems to have plenty of good will among the investor community and is seen as a good long-term bet. Recent design wins at LG also seem to have gone down well.

So, given the extremely volatile nature of these compound semiconductor stocks, this seems to be how we should best view these companies – as long-term bets. Any firm that differentiates itself with a new, potentially disruptive technology is seen as a risky investment in the financial community. And speculating on compound semiconductor stocks is clearly not a vocation for the faint-hearted.

• Michael Hatcher does not own or intend to purchase any of the stocks in this article.



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