The share price has fallen further since I last looked at semiconductor wafer maker IQE (LSE: IQE), and that’s largely because of a warning issued by the company in early November.
We heard that a “major chip company in the VCSEL supply chain” was facing a slowdown in shipments to one of its 3D sensing laser diode customers, and that’s going to hit revenues at IQE in turn. Full-year revenue is now expected to come in around £160m, up a bit from £154.6m in 2017. But EBITDA is expected to drop, from 2017’s £37.1m figure to approximately £31m.
That’s not good news, obviously, at a time when investors were hoping to see IQE getting closer to a return to earnings growth.
Instead there’s a 46% EPS slump on the cards this year, and even though it’s expected to bounce back next year, forecasts suggest 2019’s earnings will still be a little below 2017’s.
Recovery?
Should IQE’s earnings growth pattern reestablish itself in the next couple of years, I can see the shares eventually enjoying an upward re-rating. But the trouble is, at current valuation levels I just don’t see there’s any safety margin in the price at all.
We’re looking at a forward P/E of 38 for the current year, and even the EPS recovery pencilled in for 2019 would only drop that to a still heady 21. What’s more, there’s still a significant number of investors out there who are actively betting against IQE, with around 20% of its shares currently on loan to shorters.
I can see another volatile year for IQE shares ahead, and I’d steer clear until we at least see the return of earnings growth.
Short banks
Speaking of shorting, Steve Eisman (known for the film The Big Short) has revealed he has short positions on three UK banks. He has declined to name them, but I expect many people will be making guesses.
Mr Eisman reckons either the failure of the government’s Brexit negotiations or Jeremy Corbyn coming to power in a new general election could individually be enough to hit the markets. If that’s true, both together could do some damage — and we must remember that Eisman successfully called the 2008 banking crash.
While I have no idea which banks he has bet against, the three obvious candidates for shorters to me would be Lloyds Banking Group, Royal Bank of Scotland and Barclays — I can’t see HSBC Holdings or Banco Santander being hurt by Brexit, or even by a Labour government.
Buy or sell?
So should we sell banking shares? Well, I wouldn’t be at all surprised to see a rocky ride for bank stocks over the next year or so, and the prospect of a failure by Theresa May to get the backing she needs for her Brexit deal could well hit them.
But I still think they’re solid for the long term, and I’m more interested in whether they can keep their dividends going. Lloyds’ dividend yields are forecast to approach 6.5% in 2019, with RBS’s yield getting close to 6%. And even Barclays’ is expected to be up to 4.9% by then.
With the three banks on P/Es of 7 to 8, over the long term I can only see an upside.
