Why We’re Trimming Our Gains in Teradyne Stock
In the age of Instagram influencers, authenticity has been increasing in value as an asset. Authenticity is about saying what you think and then seeing who happens to be attracted to it. In the finance world, that hasn’t traditionally been the norm. You’re always putting on dog-and-pony shows that attract new clients while convincing existing clients that they can’t live without whatever it is you’re peddling. Oftentimes, this involves cherry-picking a timeframe and showing how you managed to beat whatever benchmark makes you look best.
While trying to disguise poor performance is one problem you’ll frequently encounter in the finance industry, another is people claiming to have captured alpha that they weren’t intending to. For example, what happens when you pick a stock that does really well, but that performance has nothing to do with your original thesis? That’s where we’re sitting right now with our Teradyne (TER) position.
The Rapid Rise of Teradyne
When we say a stock has “done well,” we need to quantify that performance against a benchmark. In the case of Teradyne stock, it trades on the Nasdaq exchange, so that’s the benchmark we’ll use.
As you can see, Teradyne has trounced the Nasdaq benchmark consistently over the past five years.
We first wrote about Teradyne in a piece titled Is Teradyne Becoming an Industrial Robotics Stock? and have been holding the stock ever since at an average cost of $32.66 per share. This past summer, we trimmed 20% of our position at $88 a share. Then a few days ago, we trimmed another 12.5%. After both of these trims, our cost basis (all the money we spent buying shares in Teradyne) is nearly covered. After that, we’ll be playing with the house’s money.
Even after trimming our Teradyne position twice, it still commands an above-average weighting in our portfolio – it’s the third-largest position behind NVIDIA (NVDA) and Illumina (ILMN). With the remainder of our Teradyne position up +259% right now, we’re wondering if we should trim even more. The reason we’re inclined to continue trimming is that the company hasn’t seen much growth in industrial robotics, the business segment which led us to invest in the company, to begin with.
Teradyne and Industrial Robotics
Teradyne is one of those “skate to where the puck will be” situations. They’ve expressed a desire to pivot into industrial robotics, and acquired a number of companies to further that goal. When we look at the growth across all segments since we went long Teradyne, we see that Industrial Automation is the slowest growing division at +41% growth:
|Semiconductor Test||System Test||Industrial Automation||Wireless Test|
Industrial Automation as a percentage of total revenues in Q1-2018 was 10%, falling to 8% in Q3-2020. Even worse, for the first nine months of this year, Industrial Automation revenues are down -10.5% compared to last year over the same period. In other words, Industrial Automation hasn’t given us the spectacular growth we were expecting. Teradyne is actually becoming less of a pure-play in industrial robotics as time goes by.
In October 2020, Teradyne created a new position – President of Teradyne’s Industrial Automation Group – and gave the role to Gregory Smith who was previously President of Teradyne’s Semiconductor Test Division. Perhaps the company recognizes that growth in industrial robotics is not all that it could be. To make matters worse, the company isn’t benefiting from the surge of automation brought on by The Rona. Says the Q3-2020 quarterly report:
The decrease in Industrial Automation revenues of $22.0 million, or 10.5%, was primarily due to lower demand for collaborative robotic arms in the automotive and manufacturing markets amplified by the impacts of COVID-19.
While most other companies building automation solutions have benefited from The Rona, Teradyne seems to be the exception.
The 5G Thesis
We’ve talked before about how Investing in 5G Stocks isn’t as clear cut as some Fools would lead you to believe. One of our readers told us that Teradyne might have some exposure to 5G, and indeed it does. In the latest quarterly report, Teradyne says the following:
The increase in Wireless Test revenues of $20.7 million, or 18.4%, was primarily due to increased sales of 5G and WiFi 6 testers.Credit: Teradyne Q3-2020 10-Q
The above statement refers to the below table which shows how each of Teradyne’s four primary business segments performed for the first nine months of 2020 compared to 2019:
The increase in Wireless Test revenues is attributed to 5G and WiFi 6, so we can use this segment as a proxy for their exposure to 5G and the subsequent growth we hope to see.
The above table also shows us the tremendous growth in Semiconductor Test revenues and the decline in Industrial Automation revenues discussed earlier. That’s why we’re stoked to see that the leader who drove the growth in Semiconductor Test has now been put in charge of Industrial Automation.
What We Plan to Do
Teradyne sits in our portfolio with a current weighting of 4.62%. Since we’d rather not be overweight a stock that isn’t giving us much pure-play exposure to our desired disruptive technology – industrial robotics – we’re going to continue trimming the position slowly over time until the weighting reaches 3.85%. (We have 26 stocks in our portfolio, so 1 / 26 = 3.85.) Since there are no longer any transaction costs, we can trim shares in very small amounts over a longer time frame which helps reduce market timing risk. We’re extremely skeptical of today’s irrational markets, and freeing up some cash doesn’t sound like the worst idea.
We always need to be honest about whether or not our gains were part of a well thought out strategy, or simply the consequences of unforeseen events. In the case of Teradyne, we’re now overweight a stock that’s not giving us the exposure we’re looking for. We’ll continue trimming the position and wait until the 2020 annual report comes out to see what the bigger picture looks like.
Teradyne is just one of 26 disruptive tech stocks we’re holding right now. Want to see the rest? Become a Nanalyze Premium annual subscriber and find out now.