Don't Judge a Book Solely by its Cover - Investment Ideas
13 Aprile 2012 - 2:00AM
Zacks
II 041212
Don’t Judge a Book
Solely by its Cover
In all probability, at least one of your
parents offered this idiom during your formative years.
What’s most interesting about the metaphor is that most of us still
don’t always listen. When you think about it, the reason most
of us buy many of the products we do (including stocks) is based
upon their exterior. More accurately, we may get past the
cover but seldom read the whole book.
Rarely do we truly dig deep beneath the
surface more than a page or two. With products, we may read
some reviews online, ask a friend and maybe examine the product for
true quality before purchasing. With investments, we usually
check a couple of key fundamental metrics and maybe look at a chart
to identify trends, support, resistance, etc. and then click the
“buy” button. If you follow us here at Zacks, you may buy a
stock solely on its Zacks Rank.
There is nothing
wrong with this investing approach if you are finding success; but
can more value be unlocked if we look deeper?
The
Derivative Trades
Derivative trades are investments that lie beneath the
surface. They are opportunities that derive value from the
success of a product and might just give you more returns than the
original stock itself. The analogy would be if you found that
accountants who went to Harvard were getting the best and quickest
refunds for their clients at tax time. Sure you could hire
one of those Harvard accounts to do your taxes; but what if you
looked deeper and found they all were using a particular type of
software? Maybe the better investment would be the software
itself.
Because of its immense popularity, I’ll use
Apple as an example. The iPhone as a product is sleek, well
constructed and functions as it’s supposed to (I just bought the
4S). The millions that have been sold are a testament to its
exterior quality and the genius of its manufacturer.
But what about its construction? What of the
chips, radios and even metals used to construct those components
and even the carriers that allow it to function?
I can’t tell you that I am the first to talk
about derivative trades; but hopefully I can offer some unique
insight and maybe help your thought process when it comes to
derivative trades.
Deconstructing the Smartphone
Finding the most effective derivative trades shouldn’t be limited
to one product. Find a common thread woven through multiple
products in a sector; that way you can build a stronger thesis for
your trade.
For the smartphone it’s not just about Apple,
Google’s Android (Motorola), HTC, Microsoft, Nokia, Samsung,
Blackberry, LG, Kyocera and more are all producing phones to gain
customer popularity. If we were to disassemble all the
phones, what would we find that could be potential investments?
More to the
Touch Screen
Gorilla Glass, which is produced and sold by Corning (GLW), is the popular choice
for touch screen mobile devices of all sizes and shapes.
Beneath the protective gorilla glass (which is
coated in a conductive material so you can interact with it) is a
touch screen controller that senses where your fingers are swiping,
it might be made by Atmel (ATML) or Texas Instruments (TXN).
One layer down is the display itself, which is
the heart and soul of the phone. Displays are manufactured by
LG, Samsung, Densitron (which trades in London) among many
others. If your phone uses OLED technology, Universal Display Co. (PANL) may be
getting a royalty. Universal Display Corp. is the brains (and
holds many patents) behind a good part of OLED technology. I
was the first to talk about PANL on CNBC back in 2009.
Crunching
Data
Qualcomm Inc (QCOM)
produces many of the power management and cellular connectivity
processors that go into many smartphones. You may recognize
the brand name “Snapdragon.” What you may not have known is
that the patents for some of those processors come from a company
called ARM Holdings (ARMH), whose technology is in roughly 93% of
all Smartphones; you can learn more here.
Motorola Mobility (now owned by Google GOOG) provides main processors
for many Smartphones (iPhone uses their own). Texas
Instruments provides hardware support for Wi-Fi, Bluetooth, FM
radio and GPS functionality. Skyworks (SWKS) inserts their cellular
power hardware into many smartphones and wireless devices.
They also manufacture the full wireless chipsets for
phones.
Samsung is a popular supplier of much of the
memory needs of smartphones, but there are other players in the
game.
The bottom line is that you may be able to
find value in the maker of a great product like the iPhone or
Android, but if you look inside and find the companies that are
exposed to all of them, you may have an even bigger opportunity to
profit. Even rare earth investments are being made in
relation to the popularity and growth expectations for mobile
devices.
The best
investments are often NOT the ones everyone is thinking
about.
APPLE INC (AAPL): Free Stock Analysis Report
CORNING INC (GLW): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
UNIVL DISPLAY (PANL): Free Stock Analysis Report
QUALCOMM INC (QCOM): Free Stock Analysis Report
TEXAS INSTRS (TXN): Free Stock Analysis Report
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