Tech investors still buying the hype

By Bill Fleckenstein

I have no idea what drives the "thought" process on the part of those folks who buy tech stocks these days. Perhaps they have a romantic notion about how wonderful these names are to own. So they buy them, and therefore the stocks act "OK" -- even though companies report disappointing news. In turn, that stock buying just begets more buying.

TXN bobbleheads gobble it up

Many of you have heard of people "buying the dip." This week I'd like to discuss a variation known as "buy the hype," which is what Texas Instruments (TXN, news, msgs) bulls did last week as they focused on TXN's sunny forecast rather than its rather weak results.

One would think that when a company such as Texas Instruments misses forecasts badly enough to continue to pile up inventories (as happened throughout last year, as the company failed to anticipate the downturn that's occurred thus far), that company might have to offer some evidence of why it expects future forecasts to be more accurate.

But that was not the case on its recent conference call. Management, which shocked me at their midquarter update with an accurate assessment of their prospects -- what some might call honesty -- was back to its usual tactic: fabricating future demand out of thin air. They said: "This thing will turn around quickly," without offering any data to support their claim. Of course, they weren't held to any details by the dead-fish community, where some in fact upgraded the stock.

Hyperbole that can't stand up to scrutiny

Contrast that lapdog response with the objective analysis done by my friend Tony Rao, who toils at research boutique East Shore Partners. Tony's assessment was so on the money that I thought it would be worth sharing -- not so much because everyone needs to have an opinion about Texas Instruments the stock, but because it might be useful to see, from ground level, what the tech bulls are able to drink pretty:

"The TXN report last night was very negative, missing Street consensus on virtually all metrics. Q4 numbers appeared to be in line, but the Street lowered their numbers after TXN guided down in the beginning of December. Guidance for Q1 was poor -- with revenue guidance at $3.15 billion, versus $3.32 billion consensus, and earnings between 28-38 cents, versus 35 cents consensus. From the guidance, it's obvious that the company has no clue as to what the wireless product mix will be, and whether 3G (third-generation networks that permit a new level of mobile interactivity) sales will rebound from the sharp decline in Q4. TXN had a book-to-bill of .89, which is the lowest bookings rate they've experienced in two years.

"So what do they do in this environment? They have begun to reload their fabs (fabrication facilities) in anticipation of increased demand. They have no forecast from handset customers to support this thesis, and the moribund booking rates in Q4 certainly don't support this. They state they are doing this because last time, when handsets turned down in 2004 near year end, when the market rebounded in mid-2005 they could not meet demand. One should note that the falloff in 2004 was much less severe than it is currently. So, they are basically banking on a return of demand. (2004 was an inventory correction. This is, too, plus a weakening of demand.)

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