Friday, March 27, 2009
(Cont'd from above)...

A lot of people like to treat speculation like it is a dirty word… but the fact is, those are the same people who tell you to buy stocks and never let go of them… these people have lost you so much money every time the market declines dramatically… as far as I am concerned, they have no credibility what so ever… until they admit, that sometimes selling stocks is a good idea… the rigor behind their analysis, frankly non existent… but no one calls them out except for me… so they get the free pass… that you would never see in any other walk of live… I ask you, can you imagine someone on ESPN praising a coach who hasn’t won a game in 10 years… that is exactly the record of those who oppose this show’s teaching… and my anti-homework… status… that is right… see if you did homework, you might sell.. and that gets you out… which is what sometimes is very right.

So what is speculation… it is finding a small cap stock sometimes with an under $10 share price… sometimes not… maybe it is a sexy stock that could potentially go much higher, even as it is more risky than usual…

Take a stock like Silicon Laboratories, Inc. (SLAB)… or Slab as it is called by everybody, and for now maybe for you as a home gamer… SLAB is a little semiconductor company that could… now this morning, Taiwan Semiconductor (TSM), a company that makes some of SLAB’s chips, along with chips for a variety of other much larger companies, came out and said that the outlook for the global semiconductor business is much better than it was a month ago… and that is after raising its first quarter sales and marketing forecast earlier in the month… thanks to a rush of orders from the strongest country on earth, China… the semis are part of the tech rally… and admittedly one that pulled back today… but I mean, come on, it is up the most I have ever seen an index in such a short period of time.. and these actually have something genuinely good going for them… even if they are just doing well because their customers cut back too hard on inventories… and now need to restock… and because of China’s $41b wireless infrastructure stimulus plan… the communists really now how to get things going… I would trade their Polit Bureau for our Congress in a heartbeat.

So what does SLAB do precisely… it is easy to have no idea what an underlying company actually does when you are dealing with tech stocks… but whenever I bought something that I didn’t understand, I almost always lost money… which is why I always explain what the companies I talk about do… and tell you how a professional would analyze them… so you can do this, you can learn… SLAB’s chips are used in a very broad range of devices… they use them in mobile phones, medical instruments, meter readers, voice over internet devices, GPS gizmos, HDTV, precisely the products that Best Buy told us are beginning to sell right now like hot cakes… although, having been a guy who likes to hot cakes at IHOP, I know that it is the bottomless pot of coffee that drives the adults to the Cramer fave dining establishment.

SLAB’s products may be disparate… but the company's basic strategy which has allowed them to successfully innovate for the past decade… is what, it is called disruptive technology… something that is actually like, sounds a lot cooler than it actually is… basically SLAB likes to look at large existing markets where conventionally companies have been using a whole bag of parts… and it replaces that whole bag with a single chip… while maintaining quality of performance… that allow its customers to make their devices smaller, pay less, use less energy… and I have to tell you, it is the answer to make things miniaturized… the great thing about operating this way is that has allowed SLAB to build up a broad stable of customers… companies that have spent a lot of time and effort integrating SLAB’s chips into their product design… and it would cost them a lot of money to switch the parts to another company, that is built in… so SLAB is not a commodity… and their customers are practically a who’s who… who are we talking about, Apple, Nokia, Samsung, Garmin, Cisco, Phillips, Echo Star, TIVO, Motorola, yeah they have got the who stable… they use them to make anything from better flat panel TV’s to high bred cars.

The company has been good about cutting costs… managing inventories during this down cycle… not many companies have… they have been able to maintain its gross margins… that is the percentage of each dollar of sales that becomes a profit… their margins are above 61%… even as revenues declined 12.5 sequentially… and 1% year over year in this fourth quarter… okay, margin 61%, you hear it what does it mean… that may seem like authentic Wall Street jibberish to you… but I was taught, and taught at Goldman Sachs to always look for companies that make more money from sells than others… and I regard these, SLAB’s gross margins, as exceptional… they are Intel like, I mean that is the king of gross margins, because they are almost a monopoly.

In the cut back, SLAB closed a design center… cut back on contract employees… eliminated executive raises for 2009... socialists… all of this has turned SLAB into a leaner, meaner semiconductor designing machine, now that the business is improving… alright, what price… today it was at $27... got $7 per share in cash, huge cushion.. 21 times earnings… low end of historical range between $20 and $30... over the last 90 days the streets consensus estimates has been slashed by 40%… in other words, that assumes that the companies operating margins will contract by over 40%… that is the thing that happens when numbers get cut… I don’t think that that is possible… I think that given the cost controls that SLAB has, that the semiconductor business seems to be turning around… these are all much better than what the street thinks… would it be great to wait until a $25 pullback… of course… just for the sake of being responsible, remember why we do these speculations on Friday is so that you have the whole weekend to cool you heels and do your homework… also keep in mind, unlike most of what we talk about on Mad Money… speculative stocks are trades not investments… when you buy you should have some kind of an idea about when you are going to sell when you do a trade… because we don’t believe in letting our investments or trades run forever, that is buy and hold… but we have a specific reason why we want you to buy SLAB right now… it is a play on the next quarter being better… so if I were you I would own it for the duration of the quarter and then sell when the company reports… that is it… the trade is over… it is one of my rules that you never turn a trade into investment… don’t stay parked in a stock that you bought to try to capture relatively short term move after that move has passed.
Here is the bottom line on SLAB…

Read Jim's next Segment here  
    

Read Jim's next Segment here