Michael Burry Is Betting Against Chip Stocks: 3 Sells I Agree With
Iconic “Big Short” investor, Michael Burry, has shorted these chip stocks to sell. The latest round of 13-F filings revealed that Burry’s Scion Capital Management shorted Blackrock’s (NYSE:BLK) iShares Semiconductor ETF (NASDAQ:SOXX) with 100,000 Put options. The nominal value of Burry’s short position stands at approximately $47 million, which is nearly half of Scion’s liquidity. As such, I think it’s safe to say that Burry’s semiconductor short is a conviction play.
SOXX ETF has a concentrated portfolio, with its top ten holdings spanning nearly 60% of its asset base. Therefore, I have reason to believe that Burry’s trade targeted a few of the big chip makers instead of the industry as a whole.
Although I’m not overly bearish on chip makers, I think a few will retrace in the following quarters. Let’s discuss three chip stocks to sell.
Broadcom
Michael Burry isn’t the only noteworthy market participant with a bearish outlook on Broadcom (NASDAQ:AVGO). In fact, David Tepper’s Appaloosa recently disposed of its Broadcom position. Moreover, Broadcom’s more than 75% year-to-date surge has led to an abrupt increase in AVGO stock’s put/call ratio, which currently sits above three. Therefore, it appears like many tactical investors are starting to downscale their Broadcom bets by either hedging or short selling.
Furthermore, Broadcom is in the midst of an acquisition. The firm is set to acquire VMware (NYSE:VMW) for $69 billion, subject to final regulatory approval. Although VMware may add long-term value, Broadcom’s stock could suffer from merger arbitrage, a market-based anomaly that says acquiring companies’ stocks tend to drop after an acquisition before regaining momentum once synergies occur. Thus, I believe the VMWare deal presents additional substance to a short-term revision in Broadcom’s stock price.
Lastly, key metrics suggest that AVGO stock is cyclically overvalued. For example, the stock’s price-to-sales ratio of 11.63x is nearly 67% higher than its 5-year average. In addition, Broadcom’s enterprise value-to-earnings before interest and tax multiple of 21.56x is more than 33% higher than its 5-year average. Therefore, I conclude that recent events paired with AVGO stock’s price multiples communicate that the asset is set for a drawdown.
Texas Instruments
Texas Instruments (NASDAQ:TXN) is in a difficult period. The company’s stock has plummeted by almost 10% in the past six months owing to a series of misfortunes, including a significant third-quarter revenue miss. I’m a big Texas Instruments fan. However, as illustrated by its recent performance, the stock is in a tizzy and probably worth staying away from for the time being.
As already mentioned, Texas Instruments suffered a third-quarter revenue miss. The company’s top line settled at $4.53 billion, missing by $56.13 million. Much of the firm’s quarterly headwinds stemmed from weakening industrial production, which could remain a concern as the economy resumes its decendance. Furthermore, Texas Instruments’ quarterly net income slumped by 26% to $1.7 billion, indicating that lower global input costs were not sufficient to save Texas Instruments’ bottom line.
Another factor to consider is that many investors hold exposure to Texas Instruments as a “bird in hand” play. The firm has escalated its dividend payouts for 20 straight years compounded at 25% annually, placing TXN stock’s dividend yield at 3.32%. However, diminishing industrial demand and resilient input costs have sent the stock’s free cash flow margin into negative territory. Therefore, the question beckons: Will we see a TXN stock sell-off from its dividend loyalists?
In my view, TXN is one of the chip stocks to sell.
Analog Devices
Analog Devices (NASDAQ:ADI) has an outlook problem. The company released its fourth-quarter results on Tuesday, revealing an earnings miss of one cent per share. Furthermore, the firm’s management provided an underwhelming first-quarter outlook with a revenue estimate of $2.5 billion. If the outlook is realized, Analog’s first-quarter revenue would be 8% lower quarter-on-quarter, trivially leading to an unwanted scenario.
In a similar vein to Texas Instruments, Analog suffered from waning industrial demand during its third quarter. The segment’s quarterly revenue landed just shy of $1.7 billion, a 20% year-over-year decline. Although Analog Devices’ quarterly automotive revenue grew by 14% year-over-year, its communications and consumer revenue dipped by 32% and 28% apiece, conveying near firm-wide demand struggles.
Even though I foresee a recovery in Analog Devices’ communication revenue, the interest rate cycle has a long way to go before industrial and automotive demand hits sustainable levels. Sure, ADI stock’s price-to-earnings ratio of 24.69x isn’t bad for a growth stock. However, industry-based systematic and fundamental risk factors will likely prevail, consequently sending ADI stock into a slump.
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
