Semiconductors. The talk of the town and today is no exception. It’s been (and is) a must have sector for investors. It’s also a sector where the media and bears can’t stop trying to call the top.
Three months ago we posted an article here on Linkedin – ‘Chips with everything’ in which we showed that a high percentage of stocks within a Global Semiconductor basket were ‘flashing’ the Apollo Accelerator long signal – a re-estimation of an acceleration in expected returns by the market or simply put. Good things are expected.
That was an important and positive indication of what was going on at a fundamental level across the individual stocks but also the sector. Aggregating individual stock level signals from the bottom up gives the sector perspective. It was there for all to see.
Today I want to point out something else that helps explain why share prices continue to perform well and what could end the party.
In recent posts I have discussed and shown an image of the Apollo Fair Value drivers that demonstrate the relative importance through time of each of the fundamental factors driving the Apollo FV calculation.
For LVMH it was and continues to be Book Value and Cashflow, while for Microsoft (see earlier posts) it’s also Book Value. Of the 5 factors – Earnings, Book Value, Cashflow, and EBITDA that create the FV calculation, Apollo shows which if any are more significant to the movement of the share price at any point in time – i.e what do investors care about.
The image below tells a story for Global Semiconductors and Price/Ebitda is the most significant driver, or another way of saying margins / return on investment. It’s just an interesting observation and it also happens to be a truism.
The market’s focus is on margins which explains why share prices are moving higher, but that same indicator will also be the canary in the coal mine. When the market suspects that story is over, there could well be a day of reckoning.
