The Inventory Dilemma: Why Are Short Sellers Targeting Lattice Semiconductor Corporation (LSCC)?
We recently published a list of 10 Worst Small Cap AI Stocks To Buy According to Short Sellers. In this article, we are going to take a look at where Lattice Semiconductor Corporation (NASDAQ:LSCC) stands against other worst small cap AI stocks.
The September Interest Rate Cut
Analysts have been anticipating interest rate cuts for a while now, with bets on either a 25- or a 50-basis point reduction. Concerns about potential economic instability and the impact of these cuts on net interest income for banks added complexity to the market outlook. However, the situation was sorted when the Fed cut interest rates by 50 basis points on September 18 this week, marking its first easing of monetary policy since the pandemic began.
This reduction was prompted by growing concerns about the labor market’s health. Following this decision, the Fed’s benchmark rate now stands at a range of 4.75% to 5.0%.
The Fed’s Summary of Economic Projections indicates that policymakers anticipate further cuts, with expectations of a half-point reduction by the end of this year, an additional full percentage point in 2025, and another half-point cut in 2026, ultimately targeting a range of 2.75% to 3.00%. Fed Chairman Jerome Powell stated that the projected rate cuts are not urgent and that the timing for easing is appropriate.
As political dynamics unfold ahead of the presidential elections in November, Powell emphasized that monetary policy decisions are based solely on data and economic outlooks rather than political considerations.
While a lot of analysts suggested that a 50 basis-point rate cut could be an over-exaggeration, Erika Najarian, UBS senior equity research analyst, just earlier this week, mentioned that small- and mid-cap stocks could benefit from a 50 basis-point cut. We talked about this in another one of our articles, 16 Best Mid Cap Growth Stocks To Buy Now, here’s an excerpt from it:
“Najarian attributes the recent underperformance of financial stocks to market concerns about the implications of potential rate cuts for economic stability, leading investors to question a less favorable economic outlook. She believes some anticipated cuts may already be reflected in money center bank stock prices due to their strong year-to-date performance. A 50 basis point cut could especially benefit mid-cap stocks affected by commercial real estate issues. She explains that a 50 basis point cut would significantly impact net interest income. Money center banks benefit more from rising rates, while mid-caps are liability-sensitive and may see deposits repriced faster, favoring them if rates are cut aggressively…. She points out that banks must choose between cutting rates to remain competitive or maintaining volume, complicating forecasts for net interest income.”
Right after the Fed’s announcement, Mark Avallone, president at Potomac Wealth Advisors, discussed his reaction to the Fed’s 50 basis-point rate cut, considering the recent financial market fluctuations sparked by this decision. The move led to a volatile trading session, with the Dow Jones Industrial Average initially reaching all-time highs before briefly turning negative. By the end of the session, the Dow was up 188 points, while the S&P 500 rose by half a percent and the NASDAQ climbed approximately 0.8%.
Mark Avallone expressed surprise at the Fed’s decision but emphasized that investors shouldn’t make impulsive decisions, but rather utilize potential opportunities in small and mid-cap stocks, which he believes will benefit from a lower interest rate environment. He noted that these stocks are currently valued at about 50% of the forward price-to-earnings ratio compared to large-cap stocks, making them an attractive investment option.
Avallone warned investors to be cautious with traditional banks, especially mid-sized and large ones, based on his experience at Bank of America. He believes that the recent changes in loan pricing after the Fed’s rate cut would hurt banks’ overall revenue and income from interest. Since deposit rates are likely to stay high due to competition from non-bank financial companies and money market funds offering attractive rates above 5%, traditional banks might find it hard to stay profitable.
He suggested that it may be too late for significant moves in fixed-income investments, as many investors have already lengthened their bond durations. He recommended pausing further adjustments until it’s clear whether the rate cut is due to an economic slowdown or a preemptive action.
So, while the Fed’s interest rate cut has created uncertainty in the markets, Avallone’s analysis highlights specific sectors and strategies that could offer potential growth amid these challenges. With that context, we’re bringing you a list of the 10 worst small-cap AI stocks to buy according to short sellers to short sellers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A row of robotic arms in a factory, assembling semiconductor products.
Lattice Semiconductor Corp. (NASDAQ:LSCC)
Short % of Shares Outstanding As of August 30: 8.83%
Market Capitalization as of September 14: $7.17 billion
Number of Hedge Fund Holders: 28
Lattice Semiconductor Corp. (NASDAQ:LSCC) is a semiconductor company specializing in the design and manufacturing of low-power field-programmable gate arrays that can be customized for various applications. It incorporates AI capabilities into its products, enabling smarter and more responsive devices in fields like machine learning, edge computing, and IoT.
The company had a slightly rough second quarter in 2024, with a 34.72% year-over-year decline in revenue, which came out at $124.08 million. This was $6.10 million lower than Street estimates. The earnings per share was still $0.23.
Despite strong demand, the company continued to under-ship products in Q2 due to inventory normalization. Industrial and automotive markets remained weak, with revenue down 23% sequentially. In communications and computing, revenue remained flat, with strength in data centers offsetting weakness in wireless. Management anticipates inventory normalization to continue through the second half of 2024.
Its small FPGA portfolio’s 7 to 5 family is ramping in Q3. Lattice Semiconductor Corp. (NASDAQ:LSCC) recently launched MachXO5D-NX and the latest Sentry solution stack, extending its leadership in security-focused hardware and software. It also launched Certus-NX-28 and Certus-NX-09, offering class-leading power efficiency, small size, and reliability.
In the mid-range FPGA portfolio, it launched 3 Avant devices. Avant-E achieved initial revenue last December and is expected to ramp throughout this year. The company aims for Avant-E and NX to achieve initial revenues before the end of this year. 90% of Avant customers are already Lattice customers. The Avant product line is generally strong, expanding TAM and driving long-term revenue growth.
The company’s hardware and software solutions are used in various AI applications, including data center servers, edge AI, and sensor data aggregation. It recently launched a Lattice NVIDIA Edge AI solution. Differentiated solutions position Lattice Semiconductor Corp. (NASDAQ:LSCC) for long-term growth.
Carillon Eagle Small Cap Growth Fund stated the following regarding Lattice Semiconductor Corporation (NASDAQ:LSCC) in its Q2 2024 investor letter:
“Lattice Semiconductor Corporation (NASDAQ:LSCC) provides chips used in various end markets. Investors have been disappointed this year as growth has slowed from last year’s much more robust pace. Furthermore, a surprising departure of the well-regarded CEO added to the shares pulling back. We believe the company is very well positioned to gain market share with its current line of products as well as new announcements that should help the company grow well above market rates for the next couple of years. The announcement of a permanent CEO from a well-regarded company also could alleviate concerns about the company’s management.”
Overall, LSCC ranks 5th on our list of 10 Worst Small Cap AI Stocks To Buy According to Short Sellers. While we acknowledge the potential of LSCC as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LSCC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.