Profits from the iPhone flow to more stocks than just Apple--here are five that could outperform even the mother ship
10/12/2012 8:30 am EST
In this post I’ll give you five suggestions for stocks where the Apple and Samsung spheres of influence overlap. But let me start with the phenomenon that is Apple and the idea of a sphere of influence in the stock market.
What is Apple (AAPL)?
Of course, it’s an individual stock and a handsomely profitable one to investors who have held it for the last 12 months. Despite the shares’ recent correction from the 2012 high of $702 to the October 10 close at $641, Apple’s stock is still up 66% in the last year.
But at a market capitalization of $600 billion, Apple’s effect on the market is greater than that of any other single stock. It’s not stock market sector, but the stock has the clout of one. This single stock carries a weighting of 24% in the Standard & Poor’s technology index. That’s more than three times the weighting of Microsoft (MSFT) or IBM (IBM.) It’s not coincidence that Apple peaked at $702 on September 18 and the technology heavy NASDAQ Composite peaked at 3184 on September 14 (holding essentially at that level until September 21.) Since then Apple shares are down 8.7% through the close on October 10 and the NASDAQ Composite is down 4.1%. (Five technology stocks make up about half of the NASDAQ 100 index—Apple, Google (GOOG, Microsoft (MSFT), Intel (INTC) and Oracle (ORCL.))
But Apple’s influence on stock prices extends beyond the effect you’d expect from a stock with the market’s biggest market capitalization. Apple is also the center of a web of suppliers and assemblers and retailers. For example, chipmakers such as Broadcom (BRCM) and Qualcomm (QCOM) see their revenues climb as Apple sells more iPhones. Their shares rally when forecasts for Apple’s sales of the iPhone 5 climb from 30 million units in 2012 to 40 million to 50 million and beyond. And they fall when Wall Street analysts think better of their enthusiasm and cut their projections from 53 million units in 2012 to a mere 49 million as has happened in recent days. Again it is no coincidence that shares of Qualcomm have fallen by 8.1% from September 18 to October 10—essentially tracking Apple’s performance.
I think you can call this set of companies and stocks that are linked with Apple, Apple’s sphere of influence. These are stocks whose performance, to a greater or lesser degree, depends on Apple’s sales and revenue—and the ebb and flow of market perception and forecasts about Apple. Shares of Broadcom, for example, were down 10.8% in this same September 18 to October 10 period because of the stock’s link to Apple. And the shares fell even harder than Apple because Broadcom had been seen—and had been bid up—as one of the biggest winners from Apple’s iPhone 5 design. The company retained its previous design wins worth about $3 to $5 per phone and then added a new win for the track pad controller worth about $3 per phone.
But there’s one major difference between Apple itself and the Apple sphere of influence stocks. Apple and Samsung are locked in a fierce battle for smartphone market share. When Apple wins, Samsung loses and vice-versa.
However, Broadcom, to take one example of an Apple sphere of influence stock, wins when either competitor wins since it sells chips to both. Broadcom chips show up in the iPhone and the iPad, and in Samsung’s Galaxy SIII. In 2011 Apple accounted for 13.1% of Broadcom’s revenue and Samsung for 10%.
You can see the same overlap of the Apple and Samsung spheres of influence at Qualcomm with an overlap with Nokia (NOK) and the Microsoft Windows Phone platform thrown in. (Qualcomm’s presentation at the Sterne Agee technology conference in May, for example, is illustrated with photos of phones from Apple Samsung, Sony Ericsson, Nokia and others.)
But it’s not only these well-know chipmakers that participate in these overlapping spheres of influence. For example, Skyworks Solutions (SWKS) and Avago Technologies (AVAGO) provide power amplifiers (RF chips) that boost the signals from wireless devices to cell towers. Basic wireless phones have one chip—cost about $1—so they can operate on a single network. Smartphones have multiple chips (Skyworks has two in the iPhone 5) and additional chips as part of their 4G/LTE capabilities. (Avago won the 4G/LTE socket in the iPhone 5.)
And this sphere of influence overlap isn’t just for chipmakers either.
One of the more interesting overlap plays is Japan’s Tatsuta Electric Wire & Cable (5809.JP in Tokyo.) Among other things Tatsuta makes electromagnetic wave shielding film, a thin layer of insulation used to shield printed circuits in smart phones and tablets. A smart phone might use films costing about 25 cents, but because Tatsuta has demonstrated to Apple and Samsung that it can rapidly ramp up production—without quality problems—to meet surges in demand, the company makes near-monopoly margins. Tatsuta’s electronic materials unit saw a 33% operating profit margin in the March quarter of 2012. Sales of shielding film show a 0.9 correlation with shipment volume and surface area in smartphones and tablets, according to Credit Suisse.
Which one of these five overlap plays you decide to add to your portfolio depends your tolerance for volatility. The more closely a stock is identified with Apple, the more it rides the volatility of that stock. Right now, after the current correction in Apple shares (which may or may not be over) Broadcom and Qualcomm look especially attractive because they’ve pulled back with Apple. I’m adding Qualcomm to my Jubak’s Picks portfolio http://jubakpicks.com/ today. From the October 10 close to my 12-month target price of $82.50 is a potential gain of 38%. A stock like Tatsuta Electric, on the other hand, is looking at a smaller potential gain over the next year of 17% by my calculations, because just about nobody connects the stock to Apple, but for that same reason the potential gain would likely come with much less volatility.
And don’t forget Apple itself. The stock, already a member of my Jubak’s Picks portfolio, shows a potential 18.6% gain to my target price of $760 from the October 10 close at $641.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/