Tuesday, October 16, 2007

Build Your Own High Gain Stock Portfolio, One Sector At a Time

There are many ways to construct your own stock portfolio.

One way to create a diversified portfolio is to choose stocks from different sectors that follow these criteria:

  1. The stock is in a good sector.
  2. The stock is a good stock in a good sector.
  3. The stock has Reasonable Valuation:
    a. PEG < 2.0 (Price-Earnings to Growth Ratio).
    b. Forward PE < 40
  4. The stock shows Strength:
    a. Stock is within reach of a 52 week high.
    b. Stock is above the moving averages (200 day, and even 50 day moving average).

Here are a few suggestions that mostly fit the criteria above. One could create a portfolio by choosing a stock or a few stocks from each sector below.

A. Tech: Internet and Information

We are in the middle of a society changing Information Revolution, and the Internet plays a central role.

SymbolStock NamePEGForward PE5 yr growth
GOOGGoogle0.91 3133.88%

B. Tech: Mobile Convergence and Mobile Devices

One of the major trends is the trend towards Mobile Convergence. Rather than have separate devices, such as a cell phone, a camera, and a music player, all these features are being integrated into a single mobile device. The Apple Iphone is a web browser, a music player, and a cell phone. Cell phones now come with cameras and music playing capabilities.

In addition, globalization is helping this sector out as international and emerging markets are adopting these mobile technologies in great numbers. One Indian person has even said that in India, even beggars have cell phones.

SymbolStock NamePEGForward PE5 yr growth
RIMMResearch In Motion1.0435.0633.61%

Aside from the Apple iphone, Apple (AAPL) has many other products as well such as the Apple iPod music player, and the Apple iMac computer.

Nokia (NOK), is also a play on Global Positioning as it is acquiring Digital Map Maker Navteq (NVT).

C. Tech: Networking/Digital TV/Telecom Equipment

Another trend is in the Network.
  1. There is a trend having greater Bandwidth for advanced services (for example, High Definition Video on Demand).
  2. There's the conversion of analog TV to digital TV. On February 2009, companies are supposed to stop broadcasting analog television, and are supposed to broadcast digitally.
  3. There is the Battle for the Digital Living Room. From IP Television (IPTV), to Digital TV, to High Definition TV sets, to Digital Video Recorder Technology (DVRs), to digital set-top boxes, to streaming content from computers to the big screen, the battle for the Digital Living Room is just beginning.
  4. The trend also includes wireless telecommunication systems that help bring advanced services (video on a cell phone) to mobile devices.

SymbolStock NamePEGForward PE5 yr growth
NNDSNDS Group0.6916.3923.75%

Cisco (CSCO) is the big company in Networking. They also have Set-Top Box exposure (access to the Digital Living Room) with their acquisition of Set Top Box maker Scientific Atlanta.

Corning (GLW) makes glass and equipment for higher bandwidth optical networking. They are also a play on the Digital Living Room as their products are needed by those who make flat panel displays and High Definition TVs.

NDS Group (NNDS) is the United Kingdom's version of the overhyped Chinese company China Digital TV (STV). The company engages in the supply of open end-to-end digital technology and services to digital pay-television platform operators and content providers worldwide. They even supply middleware and Digital Video Recorder Technologies, and Set-Top Boxes, and they support high definition TV.

Harris (HRS) is a company which operates in four main segments from Government Communication Systems, RF Communications, Broadcast Communications and wireless networking through Harris Stratex (HPTX). Their Broadcast Communications Group is involved Digital TV. They also benefit from a good win rate on government contracts.

D. Tech: GPS and Global Positioning

A major growth area in tech is in Global Positioning Technlogies. This technology is more than just turn by turn directions on a navigation device. In the future, as part of Mobile Convergence, GPS will be integrated into almost any device which can move, such as a cell phone.

SymbolStock NamePEGForward PE5 yr growth
SIRFSirf Technologies0.7720.4426.62%

Garmin (GRMN) mainly makes Global Positioning Devices. They are big in the car navigation and aeroplane navigation market. Recent concerns include the intended acquisition of their Digital Map Supplier Navteq (NVT) by Nokia (NOK).

Trimble Navigation (TRMB) makes GPS products. They are also a unique play on the good Agriculture market, as they even have GPS equipment for farm equipment and tractors.

Sirf Technologies (SIRF) makes GPS semiconductors. Their chips are finding their way into devices such as cell phones.

E. Tech/Consumer Discretionary: Computer, Video and Online Gaming

The strong Gaming cycle is continuing as three major console makers (Nintendo, Microsoft and Sony) have released major consoles.

There are also up and coming new trends such as online gaming, especially in East Asia (China).

SymbolStock NamePEGForward PE5 yr growth
SNDAShanda Interactive0.6421.2633.26%

Gamestop (GME) is the premiere gaming retailer. Why choose the winner of the console or software maker war when you can buy the retailer who sells all these products.

Shanda Interactive (SNDA) together with The9 Limited (NCTY) are dominant Chinese Online Gaming companies poised for great growth.

F. Energy: Oil and Oil Services.

Energy and Oil remain strong sectors. There's great demand as countries all over the world, especially the emerging market countries, need oil. Supply is limited as well, and harder to come by.

SymbolStock NamePEGForward PE5 yr growth
COPConoco Philips0.939.199.92%
NOVNational Oilwell Varco0.6017.8929.67%

Conoco Philips (COP) is an integrated oil company, while National Oilwell Varco (NOV) is an Oil Services and Equipment Company, and operates three segments: Rig Technology, Petroleum Services and Distribution Services.

G. Energy: Coal

Energy sources such as oil are in great demand. Coal, a very inexpensive fossil fuel, benefits from the great demand in energy.

SymbolStock NamePEGForward PE5 yr growth
BTUPeabody Energy0.939.199.92%

H. Materials

Freeport McMoran (FCX) is a gold and copper company, and both are needed by rapidly growing emerging market countries such as China.

Precision Castparts (PCP) manufactures metal components used in the aerospace, power generation, general industrial, and automotive markets. There's a bull market in aerospace and infrastructure, and Precision Castparts benefits.

SymbolStock NamePEGForward PE5 yr growth
FCXFreeport McMoran0.9810.8211.00%
PCPPrecision Castparts0.8518.1321.23%

I. Agriculture

There's a Bull market in agriculture, thanks to an influential US Farm Bill in 2002.

Monsanto (MON) makes seeds, including very specialized and drought resistant seeds. Deere (DE) makes agricultural equipment. Trimble Navigation (TRMB) is also an unusual play on agriculture as they provide GPS products to many places, including tractors and the agriculture industry.

SymbolStock NamePEGForward PE5 yr growth

J. Aerospace and Defense

There's a Bull market in Aerospace and Defense thanks to the aeroplane replacement cycle. Many of the older planes have to be replaced.

Boeing (BA) makes airplanes and is a better play than competitor Airbus. Transdigm Group (TDG) is a $2B company that supplies parts to the Aerospace industry. Lockheed Martin (LMT) is a defense contractor that makes many defense products, including military aircraft.

SymbolStock NamePEGForward PE5 yr growth
TDGTransdigm Group0.6418.2428.50%
LMTLockheed Martin1.3315.3111.52%

K. Infrastructure

With great global growth comes a great need for Infrastructure.

SymbolStock NamePEGForward PE5 yr growth
ABBABB Limited0.8320.6325.00%

L. Telecom: Emerging Market Wireless Telecom

Emerging Markets are using wireless products in large numbers. Many emerging countries have low wireless penetration so there is even more room to grow.

SymbolStock NamePEGForward PE5 yr growth
AMXAmerica Movil0.4915.8932.65%
VIPVimpel Communications0.7517.4923.37%
CHLChina Mobile0.9824.6625.14%

M. Financials

Goldman Sachs (GS) is the premier brokerage company, the gold standard.

Hudson City Bank (HCBK) is a fast growing regional bank that has very little exposure to the subprime problems, and some have speculated that along with other Northeastern banks, could be taken over by Canadian banks and other companies.

SymbolStock NamePEGForward PE5 yr growth
GSGoldman Sachs0.769.9113.12%
HCBKHudson City Bank1.0918.7317.15%

N. Asset Management Companies

Everyone is looking for the next Berkshire Hathaway (BRK.A), Warren Buffett's company.

One very good company in the mold of Berkshire Hathaway is the cash rich Leucadia (LUK), run for many years by super investors Ian Cumming and Joseph Steinberg.

Carl Icahn, another superinvestor, gives us Carl Icahn Enterprises (IEP), (Formerly American Real Estate partners (ACP)) and offers investors a way to invest with this great activist investor. Watch out for guru investors with a lot of cash to use.

SymbolStock NamePEGForward PE5 yr growth
IEPCarl Icahn EnterpriseN/AN/AN/A

O. Consumer Staples

SymbolStock NamePEGForward PE5 yr growth
PGProcter and Gamble1.6018.0711.31%

P. Consumer Staples: Drinks and Beverages

Hansen (HANS) is a fast growing beverage company specializing in Energy Drinks.

Central European Distribution (CEDC) is a Polish drink and Vodka producer.

SymbolStock NamePEGForward PE5 yr growth
HANSHansen Natural0.7630.0639.63%
CEDCCentral European Distribution1.2922.5217.50%

Q. Consumer Discretionary: Gambling Equipment

Scientific Games (SGMS) makes equipment for Lotteries, Printed Products, and Diversified Gaming. Some say this is a recession proof stock.

International Game Technology (IGT) makes Gaming Equipment for Casinos.

SymbolStock NamePEGForward PE5 yr growth
SGMSScientific Games1.0623.9422.66%
IGTInternational Game Technology1.6925.3617.20%

R. Industrials

SymbolStock NamePEGForward PE5 yr growth
GEGeneral Electric1.4716.3111.09%
UTXUnited Technologies1.4016.3911.72%

S. Healthcare

SymbolStock NamePEGForward PE5 yr growth

Friday, October 12, 2007

Another Global Positioning Company Gets Bought out: NGPS

The consolidation in the Global Positioning market continues.

Recent buyouts include:
  1. Pitney Bowes (PBI) buys GPS Software Maker MapInfo (formerly: MAPS)
  2. GPS Company Trimble Navigation (TRMB) buys @Road.
  3. Semiconductor Chip company Broadcom (BRCM) buys privately held GPS chip company Global Locate
  4. GPS Equipment company Tom-Tom (TOM2.AS) buys privately held Digital Map company Tele-Atlas
  5. Wireless handset maker Nokia (NOK) buys Digital Map company Navteq (NVT)

And the most recent company:

Novatel Inc. (NGPS), the Canadian high precision global navigation satellite system company (GNSS), is bought out by Swedish comgolomerate Hexagon for $390 Million.

Now, there are only three pure plays on Global Positioning publicly traded in the US:
  1. Garmin (GRMN): GPS Equipment
  2. Sirf Technologies (SIRF): Makes Global Positioning Semiconductors
  3. Trimble Navigation (TRMB): GPS Equipment

There should be high demand for these remaining companies as Location Based Services will continue to be a large growth area over many years.

Monday, October 1, 2007

Time to Take Profits in Garmin (GRMN) and Overweight Sirf Technologies (SIRF)?

The time to take some profits and underweight GPS device maker Garmin (GRMN) and overweight Global Positioning Chip maker Sirf Technologies (SIRF) might be now.

When cell phone maker Nokia (NOK) recently announced that they were buying Digital Map maker Navteq (NVT) for $8.1 Billion, Garmin's stock price went down around 10%.

Garmin had a close relationship with Navteq, and is a big customer of Navteq. Since the Digital Map space was a duopoly (Navteq (NVT), and privately held Tele-Atlas which was bought by European GPS Device Maker Tom-Tom (TOM2.AS)), Garmin (GRMN) might be squeezed out.

At the moment, Garmin (GRMN) is still reasonably priced with a forward PE of 27, five year analyst growth estimate of 20%, for a reasonable Price Earnings to Growth Ratio of 1.35 (a PEG over 2.0 is overvalued). In addition the automotive GPS market is growing very rapidly, and Garmin is ready to take advantage of this with around a 50% market share. There is also very low navigation device penetration of around 10%, so a lot of the growth is still ahead for Garmin (GRMN).

Garmin (GRMN) does seem to belong in a growth portfolio. But at the same time, the Nokia and Navteq deal signals a change in how the industry is positioning itself for the future.

Why would Nokia be interested in buying Navteq, a Digital map Maker? Global Positioning Services and Applications are a big growth area, and Nokia is aiming to position itself aggressively. GPS applications on cell phones and other mobile converged devices and anything that moves are the next big thing.

One big beneficiary of this is GPS chip device maker Sirf Technologies (SIRF). The company is the dominant GPS chip company and holds a 90% market share, though some say competition can reduce the market share to 70%. Still, a 70% market share in a very large growth business is still a very good market share.

For several months, SIRF's stock price had not been performing well, and has lagged other stocks in the location based service area such as Garmin (GRMN) and Navteq (NVT). Aside from earnings misses, they previously mentioned that there was a slow ramp-up with one wireless customer. Later news seemed to reverse this, as Motorola, the #2 cell phone maker, announced it was going to be using Sirf's GPS chips.

With many growth stocks with forward PE ratios above 30, Sirf Technologies (SIRF) has a PE of only 19, a five year analyst growth estimate of 26.6%, for a very cheap PEG ratio of 0.71 (PEG under 1.0 is very cheap).

There is also great consolidation in the industry (Tom-Tom Buys Tele-Atlas, Broadcom (BRCM) buys Global Locate, Nokia (NOK) buys Navteq (NVT), Trimble (TRMB) buys AtRoad, Pitney Bowes buys Mapinfo (MAPS)), and the demand for pure plays on Location Based Services will be at a premium. With a market cap of less than $1 Billion, who knows if Sirf Technologies (SIRF) will eventually be bought out.

Also, those mutual funds holding Navteq (NVT) and already owning Nokia (NOK), might have to take profits in Navteq and reallocate their capital elsewhere, so they don't overweight Nokia (NOK) too much. Are the mutual fund managers thinking of reallocating the profits in Sirf Technologies (SIRF) as well?

So yes, Garmin (GRMN) may still belong in a Growth portfolio, but maybe now is the time to take some profits and start overweighting companies such as Sirf (SIRF) Technologies.