Product Transition Year

I have learned that the phrase "product transition year" is not a happy one.

SIMG came out with their earnings (Silicon Image Reports Fourth Quarter 2007 Results; Announces Accelerated Stock Repurchase Program) and they were not too bad. But then they threw in that 2008 was to be a "product transition year" and down they went. I am more familiar with the phrase than I care to admit. If I take one lesson home with me from the past 12 months (and aye, it was an expensive lesson) it is that high-tech stocks should be treated with extreme caution in MFI.

The road is littered with my MFI high-tech debacles:
OVTI, IVAC, LRCX, TRID & SIMG.

I think the problem is that the earnings stream (the all important EBIT in both EY and ROC) for high tech companies is extremely fickle. Your product is the latest and greatest for 12 months and then it is stale. You base your ratios on the trailing 12 months and things look great and then "product transition year". That is not to say that there isn't a time to buy these stocks... but I'd say it is near the end or in the 1st quarter after the product transition year. SIMG may still do ok for me (as perhaps TRID) as I did buy them much later (after they had dropped a bunch) than say OVTI and IVAC. I think that the duller stocks (think DLX) are better suited as their earnings stream is more predictable.

Speaking of duller stocks, have been been following IAR? If you have owned it (like me) you are in a serious house of pain. They announced on Thursday morning (Idearc Announces 2007 Results) and dropped 24%. They then got down graded this morning and promptly dropped another 24%. That is sick. I did buy additional shares on the way down at $12.15 and $8.78 (that has to be cheap).

I read their transcript and their press releases. Granted, they said "slightly lower revenues" and" some operating margin contractions", but I guess I foolishly thought that was why the stock had already dropped from $38 last summer to $15.50 (pre-earnings). So we'll see. They are a steady/dull company. And if in 2008 their earnings don't drop that much, I suspect they'll go back up. I do think they're a steal at $9.70. They pay $1.37 in dividends, so that is like a 13 or 14% yield.

BBSI also announced earnings today (BBSI Announces Fourth Quarter 2007 Operating Results). They were down 8% after the release. Their guidance was certainly weak.

UNTD announced earnings on Thursday. They were the best of the lot and the stock traded up a bit (United Online Reports Fourth Quarter and Full-Year 2007 Results).

It wasn't a very good week, though I don't think I differed much from the benchmarks even with IAR and BBSI faltering. As I type this I am convincing myself more and more that IAR is a steal under $10. I may have to see if I can find a few extra sheckels.