Showing posts with label Maxim Integrated Products. Show all posts
Showing posts with label Maxim Integrated Products. Show all posts

Monday, April 27, 2009

Institutional Analysts are Almost Worthless

On December 18, 2008, I bought Maxim at 12.00/share and told my readers about my buy. Maxim is now selling for $13.70/share--a 14.1% increase in four months. The S&P 500 declined 3.1% during this same time period.

At the time I bought Maxim, JP Morgan disagreed with me. On December 16, 2008, JP Morgan's Christopher Danely downgraded Maxim stock to "underweight." In response, I wrote, "Almost all these these analyst downgrades come after the bad news has already been released. Consequently, when a major firm issues a 'sell' or 'underweight' rating, that's when contrarians and value investors should take a closer look at a stock."

My call was obviously correct, but what's really frustrating is that now, after the run-up in the stock price, several analysts are recommending Maxim.

On March 14, 2009, Canaccord Adams upgraded Maxim. Maxim's stock price was $14.05/share.

On March 15, 2009, Citigroup (C) upgraded Maxim. Maxim's stock price was $14.12/share.

If you had listened to these two analysts, you would be losing money right now. I don't disagree with the analysts' upgrades, assuming a long term horizon. I still think Maxim is somewhat undervalued, but I have considerably reduced my holdings and am waiting to re-enter at a lower price.

I continue to be skeptical of institutional analysts and their ratings. We need an independent website that ranks firms and their analysts based on their actual performance over three, twelve, and twenty four month horizons. The website should follow various analysts and rank them based on stock performance following an upgrade or downgrade. Hedge funds or well-off investors have access to such information, but the ordinary public is left in the dark when ascertaining analysts' credibility. That's a shame, because the public's relatively short term memory allows most analysts and their firms to avoid accountability. The Motley Fool has tried to create something along the lines of what I've suggested, but it doesn't track professional analysts.

I have been told that FusionIQ's proprietary software does rank analysts. I have been given complimentary access to the software, but have not had the time to actually sign on and evaluate it. I hope to provide a report on FusionIQ at some point in the future.

Disclosure: I own Maxim shares, and a family member works for Maxim.

Thursday, December 18, 2008

An X-Mas Shopping List

For those of you looking to tip-toe back into the market, looking at money flows is one way of seeing what others are buying. On December 18, 2008, it appeared investors were buying the following companies: Cisco (CSCO); Intel (INTC); Coca-Cola (KO); and Wells Fargo (WFC). Investors might also consider adding a Brazilian ETF (EWZ) and an undervalued technology company, Maxim Integrated Products (MXIM), to the above list.

The dollar's recent decline favors American companies that receive a substantial portion of their revenues abroad. Although one of my colleagues thinks Coca-Cola is sugar water and refuses to buy the stock, Coke has a decent dividend; good cash flow; and worldwide appeal. Even if a large percentage of the entire world becomes unemployed, they still have to drink something, and coffee--especially at 4 dollars a cup--is losing its status as the drink-du-jour. I also find it unlikely that people will cut back on soda, because soda is still cheaper than most other drinks.

Cisco is poised to rebound as an infrastructure play, especially if it gains ground in China and other Asian countries. Cisco has taken various actions--which include providing support after the Sichuan Province earthquake--to convince the Chinese government it wants to be a technology leader in China.

Wells Fargo represents a risky contrarian play. When the real estate market recovers--which it will, at some point--Wells Fargo will benefit. If it maintains its dividend, investors will receive around 4% while they wait, a better rate than most CDs. I considered replacing Wells Fargo with an REIT, but I used to own REITs primarily for their dividends. At this time, Wells Fargo's dividend is high enough for me to prefer its diversified business over a REIT. I also like the fact that Warren Buffett owns Wells Fargo shares.

EWZ is a Brazilian ETF. I've included it here primarily for diversification purposes, especially in the energy/commodities sector. Some investors may prefer to buy ConocoPhillips (COP), another Buffett pick, instead.

Intel (INTC) was downgraded by Jefferies and Co. today. (Interestingly, Jefferies (JEF) itself is being sold short by Barry Ritholtz, who accurately predicted the most recent market downturn.) With a 3.6% dividend yield, a dominant market position, and around $10 billion of net cash, it's hard to see Intel stock remaining at current levels. Although the U.S. market is saturated, Asian consumers will be buying more computers, and businesses worldwide will be buying more servers--products which generally require or use Intel CPUs, due to Intel's quasi-monopoly position in the processor market.

Intel's real problem is that lower-end laptops have become so cheap, they retail for about the same price as a Blackberry, iPhone, Google Android phone, and Sony Playstation. As a result, if consumers choose to delay upgrading their laptops and instead buy an iPhone or a video game console, Intel's revenue will suffer.

Maxim Integrated Products (MXIM) has no debt and finally appears to have its financial house in order, having resolved stock option backdating issues. Now that its external issues have been resolved, Maxim should do well as more consumers worldwide buy products using Maxim's analog chips. Maxim sports a 6% dividend yield.

A caveat: I don't work on Wall Street; I'm not in the business of making stock recommendations; and I don't have any financial licenses or formal financial training. Do your own due diligence before buying shares of any company. Although I currently own shares in all the companies mentioned above, I may sell all my shares in the future. Current conditions are volatile and favor short-term traders.

Disclosure: I own shares in all of the companies mentioned above. My relatives also have other financial interests, including shares, in Maxim Integrated Products (MXIM). You can read about Maxim's recent shareholder meeting here.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

I plan on revisiting these stocks a year and two years from now. Prices at the close of business on 12/18/2008:

CSCO = 16.66
EWZ = 35.95
INTC = 14.26
KO = 45.18
MXIM = 12.00
WFC = 29.65

S&P 500 = 885.28
DJIA = 8,604.99
Nasdaq = 1,552.37

Update on December 23, 2008: a JP Morgan analyst disagrees with my assessment of MXIM. We will see in December 2009 who was right about MXIM. Almost all these these analyst downgrades come after the bad news has already been released. Consequently, when a major firm issues a "sell" or "underweight" rating, that's when contrarians and value investors should take a closer look at a stock.

Monday, December 15, 2008

Maxim Annual Shareholder Meeting (2008)

Maxim Integrated Products, Inc. (MXIM) had its annual shareholder meeting today in Sunnyvale, CA. A spread of donuts, pastries, water, coffee, tea, and bottled orange juice was offered. (The donuts were an interesting option--most shareholder meetings don't offer donuts.) The meeting started at around 10:05AM and lasted until around 11:00AM. Around 35 people attended.

CEO Tunc Doluca, who replaced Jack Gifford, started the meeting by introducing the Board of Directors. Once the formal part of the presentation was over, the rest of the meeting consisted primarily of questions from shareholders. There was no video presentation.

Before I move to the Q&A session, readers may appreciate some background on Maxim. Due to financial irregularities caused by previous officers, Maxim's shares were temporarily pink-listed; however, Maxim is currently off the pink sheets and back on the NASDAQ. In fact, Maxim was just incorporated into the NASDAQ 100 index. This turnaround--from the pink list to the Nasdaq 100--is stunning, because most companies that are pink-listed never return to stock prices above the single digits or soon declare bankruptcy. Thus, Maxim appears to have put most of their regulatory woes--SEC investigations, stock option backdating, and lawsuits--behind.

Maxim's 10K, starting on page 20, summarizes the status of Maxim's litigation. It appears that if the Delaware Court of Chancery--known for being company-friendly--approves a stipulated settlement agreement, the derivative state and federal lawsuits against Maxim will also be dismissed. In addition, Page 7 of the 10K shows that the federal government's involvement in Maxim's option practices is over:

The informal SEC investigation has subsequently been settled without any admission of wrongdoing on the part of the Company and without any assessment of penalties and the U.S. Attorney subsequently informed us that its office does not intend to pursue any further investigation or action against the Company concerning our stock option grant practices.

I went online to review some of the filings in Maxim's federal litigation. Here are the open case numbers:

06-cv-03344-JW Derivative Litigation (Maxim Integrated Products)

06-cv-03754-JW City of Pontiac Policemen's and Firemen's Retirement System v. Gifford et al, filed 06/14/06

06-cv-03755-JW Corey v. Gifford et al, filed 06/14/06

06-cv-03395-JW Horkay v. Beck et al

08-cv-00832-JW In re Maxim Integrated Products, Inc., Securities Litigation, filed 02/06/08

The latest event in the 2008-filed case is Maxim’s substitution of attorney from Quinn Emanuel to Weil, Gotshal and Manges. I didn't see any filings that appeared out of the ordinary, but one of the plaintiffs' briefs caught my eye. It included charts of when Maxim's former directors granted stock options. These charts appeared to show that certain options were granted at the lowest possible price during the relevant time period. In any case, these directors are no longer with the company.

All the above circumstances have caused Maxim's stock price to reach prices last seen in 1998--over ten years ago. Yet, from a value investor's standpoint, Maxim's balance sheet is pristine--it has no debt, and around a billion dollars in cash.

I asked the first few questions at the shareholder meeting. I inquired about the status of the current lawsuits. A person who appeared to be Maxim's in-house counsel provided a basic overview of the litigation, but after realizing I was looking for more substantive details, he provided more information and a short chronology of legal events. I was pleased with his responsiveness and ability to clearly explain the litigation.

I then asked about the company's experience being pink-listed (I erroneously said, "de-listed"--for the record, Maxim has never been de-listed). CEO Doluca said that being pink-listed did not reduce the company's workload at all, because the company still had to comply with various regulations and internal controls. In fact, he said being pink-listed was a hindrance mainly because Maxim couldn't tell the public how well the company was doing. (During the period of time when Maxim had to restate its financial results, it was barred from publicly reporting various numbers.) CEO Doluca said that it was "frustrating, frankly," not to be able to tell the public more details.

Another person asked about buybacks. The CEO said the company was "buying cautiously."

Another person said that the cost of the backdating of options had cost the company 30 cents a share in earnings, and asked what the company was doing to prevent this [stock option irregularity] from happening again. CEO Doluca said that none of the directors involved in the backdating of options were still with the company. He also said that the company had revamped its stock option plan to grant options only on the first Tuesday of the month after an employee is hired.

Another person asked why the company was buying back shares "cautiously" (instead of more aggressively). The CEO said that the company wanted to maintain its strong balance sheet and in hindsight, not buying shares had been a good decision because Maxim stock had declined (along with the overall market).

This same person asked about Maxim's inventory and what the company was doing to clear inventory (making way for new products and new sales). The CEO indicated that Maxim's customers had become very cautious in their own outlook and were keeping less inventory on hand, making it more difficult for Maxim to predict future sales with clarity. In addition, because of the X-Mas season, a lot of finished products were on the market, making it difficult to ascertain when inventories would be reduced and when customer demand would pick up.

I didn't hear the next question clearly. The CEO responded that Maxim had scored various design wins and was looking forward to growth in handsets (3G), medical products, and management products.

Someone asked about additional product lines. The CEO responded that the auto market represented a growth market for Maxim. He said that even though demand was down, "for us, it's a growth market." He also indicated that security video and storage/networking sectors would experience growth.

The CEO indicated that Maxim had acquired a security video company and that various acquisitions had already broken even or would be at the break-even point by next year.

Another person asked an interesting question. I am paraphrasing, but I believe he asked how Maxim was evaluating future demand when the credit markets were so volatile and currently inefficient. The CEO talked about using a cash burn rate and other metrics. (It's refreshing to hear a CEO who can convey both financial and technological concepts effectively. Not once during the presentation did the CEO deflect a question to the CFO.)

After the praising the CEO for being responsive during the meeting, I asked him to tell me whether Maxim had a "wide moat." Warren Buffett uses the term "wide moat" to see whether a stock is worth buying. Basically, a wide moat is how secure a company's product is from competition/attack. Imagine being in a castle and having no moat. You will be invaded and possibly vanquished. But with a wide moat, attackers need to spend more time, energy, and resources to attack you and might avoid your territory. Coke's brand name and the goodwill attached to it represent one form of a wide moat. Adobe's PDF DRM support, which allows only Adobe's software to be capable of reading and creating every PDF feature with 100% accuracy, represents another example of a wide moat. What, I wondered, was Maxim's wide moat?

CEO Doluca responded that Maxim's "wide moat" was its well-diversified product lines, the numerous features of its products, and its highly innovative staff. He said Maxim's products were part of a broad IP portfolio that was highly integrated and "very differentiated" from other companies' products. Also, because Maxim's chips were "feature-rich" and multi-functional, their high level of specialization eliminated most competitors and start-ups from Maxim's target markets.

CEO Doluca also talked about how, relatively speaking, Maxim enjoyed high margins. (In general, analog products have longer lives, which allows companies involved in analog-based products to enjoy higher margins. The downside is that the longer life of analog products comes with lower growth because products don't have to be replaced as often.)

So many CEOs have a hard time with the "wide moat" question, but CEO Doluca answered it very well. I would also add that many of Maxim's employees have specialized knowledge in analog design and products. Engineers who specialize in analog design are less available on the market and tend to have Ph.Ds, making them harder to find and hire. While Microsoft won't have a hard time finding software engineers, analog technology companies have to work harder to find competent employees who can handle the high level of specialization in their products. As a result, Maxim's engineers represent a unique strength. I believe this is what CEO Doluca was saying when he mentioned his innovative employees as part of Maxim's "wide moat."

The CEO agreed with another shareholder who said that Maxim had previously been in a position where it "couldn't tell our story very well."

I was very pleased with CEO Doluca's grasp of his company's products and his ability to answer questions. I view him as an honest, knowledgeable CEO who will give Maxim more credibility on Wall Street.

Most semiconductor companies have seen their shares decline in value, and Maxim is no exception. But the semiconductor industry is cyclical, and right now, most major semiconductor companies have strong balance sheets. When the economy improves, companies like Maxim, Texas Instruments, and Intel--all of which have solid balance sheets--will be well-positioned to benefit from the economic recovery. I see a bright future for Maxim.

Disclosure: I own over 200 shares of Maxim, most of which I bought after attending the shareholder meeting; members of my family own shares of Maxim and/or have access to shares; and a relative works at Maxim. I may buy more shares of Maxim in the future. I also own shares of Texas Instruments (TXN) and Intel (INTC).

Note: The law firm of Weil, Gotshal and Manges was mentioned in this article. I was in an intern in Weil, Gotshal and Manges' Singapore office for a brief period of time. At the time, non-Singaporean law firms had to set up joint ventures with Singaporean law firms to do business in Singapore, and the law firm I worked at happened to be connected with Weil, Gotshal and Manges. As far as I know, I do not currently have any financial interests with or in Weil, Gotshal and Manges.

Correction: Maxim was in fact de-listed from the NASDAQ exchange, but Maxim shares never stopped being publicly traded.