Semiconductor stocks can be frightening over short periods — they are volatile — even though the industry group outperforms over longer periods.
Gerry Frigon, the chief investment officer at Taylor Frigon Capital Management, said two chip makers, one very large and one a micro-cap, that he believes can triple in value over the next several years.
Taylor Frigon Capital Management is based in San Luis Obispo, Calif., and has about $200 million in assets under management, mainly for private clients. For the firm’s Core Growth Strategy, Frigon focuses on technology stocks — typically small and mid-cap companies, but also large-caps if he sees tremendous growth potential.
Before founding the firm in 2006, Frigon managed portfolios for private clients and institutions at Merrill Lynch, where he worked for 21 years.
Big and small
Nvidia
In an interview, Frigon said the firm had been holding shares of Nvidia NVDA, +3.74% for 13 years, but had “culled” its holdings when the stock was in the $200-plus range, as he wasn’t comfortable at that valuation. The shares dropped to as low as $124 on Dec. 26, so he has been “scaling back” into the stock.
During the run-up for Nvidia’s stock, “everything was happening at the same time, and there was no reason to expect that to continue,” Frigon said.
Nvidia’s fiscal 2018 ended Jan. 31, and the company is expected to announce fiscal fourth-quarter results Feb. 14. The consensus among analysts polled by FactSet is for the company’s full-year revenue for fiscal 2018 to increase 22% from fiscal 2017. However, sales are expected to decline 3% for full-year fiscal 2019, before increasing 21% for full-year fiscal 2020.
With such ups and downs, you can expect alarming headlines. That ties into the “crisis industry” that Frigon believes “has captivated media, economics, politics and popular culture.”
An informed, long-term investor who believes Nvidia has the right strategy to compete over the next decade won’t fall prey to negative earnings-season headlines.
Read: Global chip sales rise to record $468.8 billion in 2018, top one trillion units for first time
Frigon believes in the company for a very long-term investment because of the potential of Nvidia’s new RTX chip.
“Developers can now start making games that are way more realistic,” he said.
“The gamers are saying they don’t want to pay up for it,” Frigon said, and that relates to Nvidia’s warning on Jan. 28 that its holiday-season sales would be $500 million less than the company had forecast. The lower outlook sent the stock down 18% to $128 that day. It’s now trading at about $148.
Some developers may be waiting before placing orders for RTX chips until they are more confident that games based on the technology will be a success.
But Frigon thinks the naysayers on RTX are being “shortsighted.”
“If you had the kids who love ‘Fortnite’ [developed by Epic Games, which is 40% owned by Tencent Holdings TCEHY, +0.66% ) 0700, -0.11% ] playing a game set in a realistic environment, it would be interesting to see how they reacted,” he added.
Frigon made clear that Nvidia passes his “litmus test,” despite an $88 billion market capitalization, because the stock can triple from here. But he stressed that his style of management is “always very long-term.”
QuickLogic
QuickLogic QUIK, +29.37% isn’t a new company, but its market capitalization is only 81 million. The company specializes in programmable chips that require relatively little power.
“Xilinx XLNX, -1.36% and Altera [acquired by Intel INTC, +0.68% in 2015] were the gold standard,” winning the market-share battle for programmable chips during the 1990s, “when there was not as much mobile stuff going on,” Frigon said.
But he believes that the “internet of things,” with so many new devices being connected to wireless networks, presents a tremendous opportunity for QuickLogic.
“When you want a long battery life, that is where programmable chips can thrive,” he said.
QuickLogic is expected to announce fourth-quarter results Feb. 13. The consensus among the three sell-side analysts covering the company is for 2018 sales to increase 7% to $12.1 million. But sales are expected to increase 75% in 2019.
Taylor Frigon’s Core Growth strategy
Taylor Frigon’s Core Growth portfolio was established in January 2007. While nearly all of the money managed by Taylor Frigon is in separate client accounts, the company also manages the Taylor Frigon Core Growth Fund TFCGX, +0.00% which follows an identical strategy, but is only about two years old, with about $12 million in assets.
The fund’s annual expenses are considered “high” by Morningstar, at 1.45% of assets. Frigon said that he expects the fund’s expense ratio to decline as it grows. For 2018, the fund was up 0.1%, compared to a 4.4% decline for the S&P 500 Index SPX, +0.45% (including reinvested dividends), an 11.1% decline for the S&P 400 Mid-Cap Index MID, +0.55% and an 8.5% decline for the S&P Small-Cap 600 Index SML, +0.88% according to FactSet.
Here’s how the Taylor Frigon Core Growth Strategy performed, with and without fees, for longer periods, through Dec. 31:
| Total returns | ||||
| 2 years | 3 years | 5 years | 10 years | |
| Taylor Frigon Core Growth — net | 10.7% | 10.5% | 7.2% | 14.2% |
| Taylor Frigon Core Growth — gross | 12.0% | 11.8% | 8.5% | 15.6% |
| S&P 500 Index | -4.4% | 9.3% | 8.5% | 13.1% |
| S&P 400 Mid-Cap Index | -11.1% | 7.7% | 6.0% | 13.7% |
| S&P Small-Cap 600 Index | -8.5% | 9.5% | 6.3% | 13.6% |
| Source: FactSet | ||||
There are 43 stocks in the portfolio, Frigon said. Some holdings are larger than others, because he might be building positions slowly, reducing holdings of stocks that have risen significantly in price, or because he is letting a successful stock ride before taking some profit. You can see the entire list as of Dec. 31 here.
Here are the top 10 holdings of the Core Growth strategy as of Dec. 31:
| Company | Ticker | Industry | Share of portfolio | Total return — 2019 through Feb. 1 | Total return — 2018 | Total return — 3 years | Total return — 5 years |
| Glaukos Corp | GKOS, +2.58% | Medical Specialties | 4.0% | 15% | 119% | 293% | N/A |
| Mellanox Technologies Ltd. | MLNX, +1.62% | Semiconductors | 3.5% | 4% | 43% | 109% | 157% |
| Kornit Digital Ltd. | KRNT, +0.98% | Industrial Machinery | 3.2% | 3% | 16% | 67% | N/A |
| Wix.com Ltd. | WIX, +0.50% | Internet Software/Services | 3.1% | 22% | 57% | 439% | 284% |
| Twilio Inc. Class A | TWLO, +0.89% | Packaged Software | 3.0% | 26% | 278% | N/A | N/A |
| Airgain Inc. | AIRG, +0.19% | Telecommunications Equipment | 2.8% | 8% | 10% | N/A | N/A |
| Tower Semiconductor Ltd | TSEM, -1.77% | Semiconductors | 2.7% | 0% | -57% | 17% | 139% |
| CryoPort Inc. | CYRX, +2.91% | Containers/Packaging | 2.7% | -7% | 28% | 489% | 123% |
| Splunk Inc. | SPLK, +1.98% | Information Technology Services | 2.7% | 21% | 27% | 166% | 65% |
| EPAM Systems Inc. | EPAM, +0.66% | Information Technology Services | 2.6% | 24% | 8% | 90% | 252% |
| Sources: Taylor Frigon Capital Management, FactSet | |||||||
Don’t miss: These three ETFs have beaten S&P indexes while cutting risk
Create an email alert for Philip van Doorn’s Deep Dive columns here.