Value Pick of the Week

No Value Pick this week.

Market Summary

The S&P 500 fell 1.9%, and the story was inflation, inflation, and borrowing.

  • Wednesday — CPI ran hot. The Consumer Price Index (CPI) came in at 3.7% year over year (YoY) against 3.6% expected. Stocks fell 1.1%.
  • Thursday — PPI ran hotter. The Producer Price Index (PPI) came in at 6.3% YoY versus 5.5% expected — a far bigger miss. Yet stocks went up and bond yields fell. When worse inflation news makes yields drop, the bond market has moved on to a different worry.
  • Friday — the weight of tech. Six of eleven S&P sectors actually finished higher, but the index fell anyway because technology dropped 3% — and technology is now roughly a third of the index.
  • The market didn’t sell AI — it sorted it. Companies that generate the cash to build held up (Nvidia (NVDA) fell just 1.4% on Friday). Companies that have to borrow it did not — AMKR and IESC were both down double digits. Goldman Sachs described hedge funds rotating out of smaller AI names toward the giants at the second-fastest pace in more than a year.
  • The split showed up in the indexes. The Nasdaq fell 4.5% while the Dow rose 0.67%. Apple (AAPL) and IBM finished the week higher — one analyst called Apple a “top defensive name” in the middle of an AI selloff, a sentence that would have read strangely a month ago.

How Our Picks Fared

There’s no other way to put it — our past picks had a bad week, losing 4.7% to the S&P 500 as the tech sector got clobbered. Seven of our past picks dropped more than 10% during the week.

📉 Dell Technologies (DELL) fell 22.9%

The week’s worst, and the one with a named catalyst:

  • Barclays’ Tim Long cut Dell from Overweight to Equal Weight on the 14th, and reduced Dell’s target to $574 (currently at $451.71, implying a 27.1% gain).
  • Long doesn’t see AI demand collapsing, but he doesn’t see any large increases in AI spending that justify Dell’s P/E of 26.3 TTM either.
  • The thesis acknowledges that Dell will probably beat expectations — just not by as much — which will put pressure on their already thin margins.

📉 Western Digital (WDC) fell 16.4%

There’s been a string of news that doesn’t bode well for WDC:

  • Around October 2nd, Toshiba announced it was spending $380 million to double its HDD production — no specific timetable was released.
  • On October 6th, Bloomberg reported that Seagate and Toshiba are competing to buy TDK’s hard drive magnetic heads business — the market reacted strongly even though TDK supplies only a small percentage of WDC’s heads, primarily for demand surges.
  • On October 12th, a UBS analyst cut his price target for WDC from $525 to $470 (WDC is currently at $332.00 — an implied 41.6% increase).

📉 Lam Research (LRCX) fell 17.2%

  • Valuation. Trailing P/E near 50x against a five-year median of 23.8x. That’s the foundation — there was no cushion.
  • Traders rebalancing ahead of Lam’s upcoming report on October 21.
  • Apparently the market decided the 10.2% gain two weeks ago — based on Micron’s (MU) increased capex plans — was too generous.

📉 Amkor Technology (AMKR) fell 14.9%

  • The Philadelphia Semiconductor Index (SOX) fell 11.4%, indicating a broad sector sell-off — something that permeated all our companies that dropped more than 10%.
  • Amkor reports earnings on October 26, and like Lam Research, investors are rebalancing ahead of the report.
  • Unlike LRCX, Amkor’s P/E TTM is 18.75 — a perfectly reasonable multiple for a technology company — and like DELL, its margin cushion may be getting smaller.

📉 IES Holdings (IESC) fell 15.3%

  • Contrary to what I reported last week when IESC lost 12.3%, there was a company-specific catalyst: IES closed its acquisition of DBM Global, a vertically integrated structural steel manufacturer, on October 5, and lost its debt-free status when it borrowed $545 million to complete the deal.
  • This past week showed that the timing was bad — after both the CPI and PPI came in hot, the future cost of borrowing became a question mark.

📉 CrowdStrike (CRWD) fell 17.3%

  • CRWD hit an all-time high on October 6th and entered this past week near record highs — primed for a drop.
  • At the beginning of the week, the general sell-off across enterprise software was on, hitting particularly hard on Friday.
  • CrowdStrike’s share price dropped 3.2% on both Monday and Wednesday, and opened down 4% on Friday, finishing the day down 7.0%.
  • The Traders Union reported that the drop was related to the CEO’s sale of 68,920 shares — never mentioning that it was a planned sale set up under SEC Rule 10b5-1 back in January, that it amounted to just 0.87% of his stake, or that he still owns 7.86 million shares (including 400,000 held in a family trust).

📉 Zscaler (ZS) fell 11.3%

  • Zscaler was caught up in the general sector drop for the week, based on AI funding fears. There was no company-specific news during the week that would cause a drop of this size.

Past Picks Review

My plan to review Aerospace & Defense past picks this week has been delayed a week. Understanding what happened last week was challenging and took a lot more time than normal.

Have a great week!

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