It was a great day yesterday for holders of RF Micro Devices (RFMD), as the stock finished the day with a 21% gain on news of a merger with TriQuint Semiconductor. I bought RFMD at $4.50 in January, so it’s been a nice trade for me so far. At the time, I identified the company as a potential buyout candidate for a much larger company. I never predicted that RFMD would close above $7.00 less that a month after I bought it, but the company has plenty of good things going for it. RF Micro Devices produces RF electronic components for smartphones made by both Samsung and Apple, and the new company created by the merger will be much larger, much more efficient, and will create some tough competition for $6.5 billion Skyworks Solutions. Fundamentally, RFMD has been profitable the past three quarters, and revenue has been trending upward while margins have been shrinking.
RFMD is not the typical value stock that I tend to hold long-term in my portfolio. However, there’s nothing wrong with owning a couple of speculative stocks, especially if the positions are relatively small. I’ve written a lot about Dynavax lately. I believe Dynavax has a lot of potential, but it is certainly a risky long-term investment. One more rejection from the FDA might mean the end of the company. Period. But a large portion of my 412% gains over the past 5 years has come from speculative trades. The key is managing risk. I’m up 90% and 56% on my DVAX and RFMD trades respectively. That’s great and all, but unfortunately those two stocks are the two smallest positions I’m holding, and together they only make up about 9% of my current portfolio. But the size of those positions was by design. Never put yourself in a position where one bad pick can cripple your returns.
I considered selling some RFMD at the end of the trading day yesterday after such a large gain, but I decided to hold my shares and watch what the future holds for RFMD. Another benefit of such a small position is that I can afford to be a little greedy, so for now I am looking forward to seeing how this story plays out.