Billionaire Ken Fisher Adds to Stake In Veeco Instruments

Fisher Asset Management, managed by billionaire Ken Fisher, has reported that it owns 2.2 million shares of Veeco Instruments Inc. (NASDAQ:VECO), giving it ownership of 5.6% of the total shares outstanding. Veeco is a $1.3 billion market cap company which manufactures equipment that is then used by other technology companies to produce LEDs, solar products, and hard disk drives among others. This is an increase in Fisher’s position from the end of September, going by the fund’s 13F filing at that time.

We think that it’s particularly important to pay attention to what notable investors are doing in the small cap space (of course, blindly following these investors may not be a wise strategy). For example, we identified the most popular small cap stocks among hedge funds in our August newsletter and that portfolio went on to produce an excess return of 18 percentage points between September and January (read more about our hedge fund strategies).

In the third quarter of 2012, Veeco’s revenue fell by 53% compared to the same period in 2011. With margins shrinking as well, earnings decreased by over 60%. Recent bottom-line performance and the current market cap places the stock at 21 times trailing earnings, and Wall Street analysts expect continued decay in net income this year; as a result the current-year P/E is 28. That seems like a high valuation for a company which has been seeing sharp declines in business. Veeco Instruments Inc. is a very popular short, with 27% of the outstanding shares held short. This demonstrates a sizable bearish community, though it means that the stock is probably expensive to short. We would note that it does have a very large cash hoard- cash on the balance sheet came out to nearly $600 million, a large portion of its market cap- but even when we look at the company’s enterprise value and cash flow the valuation does not look particularly attractive at an EV/EBITDA multiple of 7.0x.

Chuck Royce’s Royce & Associates owned 3.7 million shares of Veeco Instruments Inc. at the end of the third quarter of 2012 (find Royce’s favorite stocks); that fund tends to concentrate on small-cap and mid-cap stocks. Joho Capital, which is managed by Tiger Cub Robert Karr, owned about 940,000 shares according to its own 13F filing (check out more stocks Joho owned). First Pacific Advisors, which is managed by Robert Rodriguez and Stephen Romick, cut their stake during the quarter but still owned about 710,000 shares at the end of September.

Are any of Veeco’s peers better value prospects?

We can compare Veeco to Cree, Inc. (NASDAQ:CREE), Applied Materials, Inc. (NASDAQ:AMAT), Canon Inc. (NYSE:CAJ), and SanDisk Corporation (NASDAQ:SNDK). Of these companies, Cree is the only one with a forward earnings multiple greater than 20 (at 26) and, while that stock also has considerable short interest, revenue and earnings grew at double-digit rates last quarter versus a year earlier including a 69% increase in net income. The other three peers have forward P/Es in the 13-14 range, which represents a much more appealing pricing for a value investor at first glance. However, Applied Materials has been struggling recently with a 24% decline in revenue in its most recent quarter compared to the same period in the previous fiscal year, and in the case of it and SanDisk the forward earnings estimates are based on very high growth projections for the next couple years. As a result we think that Canon might be the best prospect for further study: its trailing P/E is 14 as well, business has been about flat, and the company pays a high dividend yield as well.

We don’t think that investors should be following Fisher in this case. Veeco’s business has been struggling, and the valuation seems high. While the company does have a sizable cash position and a turnaround is of course possible, we’d prefer to see much better value characteristics in a stock to recommend that investors do more research.

Disclosure: I own no shares of any stocks mentioned in this article.