You call this research?

August 5, 2005

View from Silicon Valley- You call this "research"?

Having started last week to pick on stock research, I have a confession to make. I subscribed to ChangeWave Investing for a few months. I actually paid them money to hear their opinions. I eventually concluded ChangeWave had successfully picked a "bottom" in March, 2003 but profits starting ~six months later were minimal and then canceled the service.

I must admit I was always impressed with ChangeWave's copy-writers. It was educational, not to mention amusing, to see how they would skirt the truth of what I could see was their actual performance. (The data is available to subscribers, although it takes 30 -40 minutes a week to track all the picks.)

Part of ChangeWave's shtick is their proprietary "ChangeWave Alliance," which they describe as "Field Experts" who supposedly give them inside knowledge of various industries. First of all, any technology company worth anything requires its employees, vendors and even customers to sign Non-Disclosure Agreements (NDAs). Taking my signature on several of these seriously, and assuming others take theirs seriously as well, I deduce these "insiders" are either failing to live up to their responsibility or just wannabe insiders or, most likely, more investment research people. On top of agreeing with Groucho Marx about never wanting to be part of club which wanted me as a member, I never bothered to self-nominate myself to this "alliance" or to put any faith in the results their surveys claimed.

Sorry for boring you with such detail but it leads to today's diatribe. (OK, today's "main" diatribe.) A couple weeks ago I received, "ChangeWave Research Report: Semiconductor Industry Trends – 2nd Half 2005."

I chalked it up as mainly just amusing but then I saw otherwise-respectable news publications reporting as though this was "research" and its "findings" were actually "news." Change Wave's "research" was being trumpeted in the same vein as research houses who do not shill you for a subscription every time you hear their name. In a particular insult to real news and research, this "news" article included a link to Change Wave's subscription page.

Just to pick a few of the more useless. or poorly thought out, comments from this "research":

"The survey findings show an improved outlook for semiconductors over the next six months, with the consumer marketplace as the key driver."

--Wow, another vote for a "2nd half recovery" in semis because consumers will keep sucking up high-end PCs, cell phones, TVs, etc. With eleventeen other research houses parroting this same line, is this "news"? Real research would follow a line like this with, "Because..." (In fairness, the "real" research usually doesn't give you a reason either...)

"38 percent of respondents think NAND will perform best in the flash memory market, up 15-points since December, while only 3 percent think NOR-style flash can perform best."

--Isn't NAND beating NOR like predicting cell phones will outsell PDAs? Does anybody really dis-agree? Digging into the underlying numbers, you find another 38% had no idea if NAND or NOR would "perform" (sell?) better over the next six months. How does one claim to be an "insider" and still not understand the global rush to NAND flash taking place?

"57% of industry respondents believe flash memory is likely to replace traditional hard drives in many electronic devices within the next two years."

--Quick, name three portable electronic devices which even use a hard disk drive. (We'll spot you the iPOD.) Then realize a 20GByte iPOD needs 20 8Gb NAND chips. At today's market price ($45, down from ~$70+ 1Q05), that's a $900 disk drive. Even if NAND prices fall 50% twice in the next two years (which is faster than recent forecasts), 20GB will still set you back $225. Meanwhile, you can get a full size 20GB disk drive for below $100 (quantity one), so figure a mini-drive in volume is around there today, then 20 -30% cheaper within two years. Changewave's prediction here also suggests their "insiders" do not understand the semiconductor or electronics businesses all that well.

"Nearly two thirds of respondents (63 percent) see increased capital spending on fab capacity coming over the next 12 months, an increase of 7-points from December 2004."

--"Increase" by itself, is only a relative term and means virtually nothing. SEMI results show bookings down -29%, billings down -9% y-o-y. The YTD book-to-bill is only 0.81 and has been below breakeven (1.00) for 10 consecutive months. Even a 30% increase in bookings over the next 12 months would leave results below 2004. (In turn, 2004 billings were still 37% below 2000.)

"Nineteen percent (19%) believe fab capacity utilization is now tight (90% or more), a 14-point increase from December 2004 – while the percentage reporting “Softer” fab capacity (less than 75%) dropped by 3-points."

--Here is an excellent example of their copy-writer's creativity with the numbers. At first blush, this implies fab utilization is tight. Digging down in the numbers, the percent falling in "firm" or "tight" actually fell from 75% to 70%.

"Samsung (Net Difference Score = +24) tops the list of companies respondents believe will gain market share in semis over the next 6 months."

--Another one for the copy-writers. Samsung wasn't even in the earlier surveys and was only tied for third in this one. The reported gain could be interpreted as technically true, however, since the "net difference" statistic they invented assumed zero percent on prior surveys. Maybe it's just me, but a 24% share and a 24% share gain are two very different data points. As is a top ranking vs. tied for third.

I could go on and on (and, as usual, I already have) but you get the idea.

ChangeWave has a unique shtick and some really good copy writers. They combine these to generate some really emotionally-urgent stock picks. However, their "research" says much less than it seems and, in a couple cases, the results are not consistent with what outsiders can plainly see.

Conclusion: Invest at your own risk. Think for yourself.

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The above is strictly for entertainment purposes and should not be construed as advise to buy, hold or sell any security, property or financial product.