Last week saw the departure from Citigroup of analyst Craig Ellis, who covered SanDisk Corporation (Nasdaq:SNDK) and msystems before that. To his credit, it must be said that the closing chapter of his term as the bank's analyst covering SanDisk was far more successful than his earlier outing with msystems. Ellis, it will be recalled, provoked uproar back in 2004 when, as an analyst new to the semiconductor sector, after previously covering energy stocks, he recommended msystems at "Sell" and sent it crashing to an $11 low.
The dismay was profound, since Ellis' own bank, Citigroup, had only just acted as lead underwriter for msystems's secondary offering at $18 a share. There can be no doubting that by taking a step so exceptional and bold, albeit misguided in my view, Ellis was essentially restating how proper Chinese walls in banks should look. It took many more months until he was finally convinced that msystems' business was seeing a positive momentum, following which he joined those recommending it, until its sale to SanDisk two years later, at a price three times the 2004 low.
Ellis' "Sell" recommendation for SanDisk in July this year was far more successful than the previous one for msystems. Just as it seemed that the stock had already taken all the punishment it could handle, sinking to $14 despite the second quarter results, he once again showed his mettle, and downgraded SanDisk to "Sell" because of the harsh market conditions the flash chip industry was facing at the time. The share's subsequent tumble to its current low of $5.60, as he takes his leave of Citigroup, shows just how right Ellis was. He also got it right when he recommended selling the share when it rose to $23 in mid-September on the tail wind of the takeover bid by Samsung. He believed then that the chances of the deal going through were slim, and that Samsung's sole purpose in making the offer was to improve its position in the run-up to the new royalties agreement it is due to sign in the summer of 2009.
Eltek - Surviving the massacre
Nearly every day articles are posted online, listing stocks which in recent times have been the victims of an onslaught that has sent their market caps down to levels that are absurd. I am now adding one of my own portfolio stocks to this list - Petah Tikva-based printed circuit board maker Eltek (Nasdaq: ELTK).
Eltek operates in three sectors which are unlikely to enter recession simultaneously, and it also specializes in small niches not exposed to cutthroat competition from Chinese manufacturers. It is strong in rigid multilayer boards for the healthcare industry, such as, for example, the miniaturized circuits in Given Imaging's (Nasdaq: GIVN; TASE: GIVN) gastrointestinal diagnostic capsules. It is also strong in flex-rigid boards for use by the military, with a range of special printed circuit boards that withstand harsh high altitude conditions or gunfire in military vehicles.
Eltek's third sector is industry, which could enter recession to one degree or another, but not, I believe, in one go, as is happening at present in the consumer sector - to which Eltek does not have exposure. Should the shekel-dollar exchange rate stay above the NIS 4/$ level next year, and if it wins just some of the big defense contracts it is currently bidding for, we are likely to see an earnings multiple of 3 to 5 for the share in 2009, assuming its price remains with the $0.70-1.10 range.
Published by Globes [online], Israel business news - www.globes-online.com - on November 25, 2008
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