Growth Investing at Totem Point

The case describes the investment of hedge fund, Totem Point Management in Analog Semiconductors (ADI) as a way to discuss forecasting and valuation in growth companies. In June 2016, hedge fund Totem Point invested in ADI at around $55 a share. In general, Totem Point aimed for their investments to yield 50% returns over a two-year time horizon. It was now 2018, and Totem Point was evaluating whether to maintain its position in ADI, expand it, or close it and walk away with its (substantial) winnings from the investment. Though the stock had done well in the prior two years, it had recently seen numerous downgrades by sell-side analysts, as its price slid 15% from a historic high. The question facing Totem Point, was whether it would grow by a further 50% over the next two years. To answer this question, Totem Point considered growth trends in each of ADI’s main end-markets: industrial applications, consumer applications, automotive applications, and telecommunications applications. If these end-markets expanded over the coming two years, ADI would do very well, but if they failed to expand, the stock would stagnate. Totem Point’s task was to figure out which scenario was most likely and what that scenario would mean for the stock’s price.