Here’s why I’ve put IQE shares on my watchlist

IQE shares have had a torrid time since an attack by short-sellers in 2017. But G A Chester is beginning to see reasons for optimism.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

IQE (LSE: IQE) shares are trading well below their high of earlier this year. And far below their high of 2017. I’ve been bearish on this AIM-listed tech stock in the past. However, it’s been a while since I last looked at it.

There’s an old saying: “When the facts change, I change my mind. What do you do, sir?” Here, I’ll discuss the changes at IQE and explain why I’ve promoted the stock to my watchlist.

Short-sellers attack IQE shares

In 2017, the IQE share price reached as high as 178.75p on 16 November. This gave the company a market capitalisation of £1.35bn. However, short positions (hedge funds betting on the share price falling) increased sharply through the second half of the year. By 23 January, more than 10 funds were shorting 12.4% of IQE’s shares.

In early February, two short-sellers — ShadowFall and Muddy Waters — published research reports claiming IQE was, in the words of Muddy Waters, “an egregious accounting manipulator.” IQE issued rebuttals.

The shares rallied but have never got back to that 178.75p level. Their 2021 high, made on 21 January, was 88.3p, and they’re currently trading at 47.5p. I can now buy 46% cheaper than in January and at a 73% discount to the November 2017 price.

Short-selling and boardroom changes

A few things have changed since the short attack. Only one fund now holds a disclosable short position in IQE shares (Ennismore at 0.91%). IQE has a different chief financial officer, his predecessor having died in tragic circumstances shortly after the ShadowFall and Muddy Waters reports. Finally, IQE’s founder and chief executive officer Dr Drew Nelson is set to handover to a new CEO.

The significantly reduced interest of short-sellers and the executive changes allay some of my past concerns about IQE’s accounting and management.

IQE shares are on my watchlist

Another of my previous concerns was that after two decades as “the global leader in the design and manufacture of advanced semiconductor wafer products,” IQE had generated little in the way of free cash flow (FCF). As I noted in an article in 2019: “Periods of elevated investment and heavily negative FCF have been followed by little meaningful FCF advance in subsequent years.”

At the time of that article, IQE was in a period of heavy investment. Capital expenditure and capitalised research and development totalled £41.8m in 2019 and FCF was negative to the tune of £25.4m.

However, this period of investment does appear to have led to a meaningful FCF advance. In 2020, on lower capital expenditure and capitalised research and development of £10.4m, IQE delivered positive FCF of £22.7m.

It may be the company has now reached a level where economies of scale are beginning to kick in. And with “record revenue of £178m underpinned by the start of the 5G mega-cycle,” the future could be very bright.

I’m not quite confident enough to buy IQE shares just yet. I’m expecting capital expenditure and capitalised R&D in 2021 to be in the region of £30m–£35m. And FCF to be insipid at best. I want to see a bit more evidence that IQE can deliver consistently higher FCF. But I’ve put the stock on my watchlist.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »