10/11/2012 7:35 PM ET|
5 iPhone stocks that aren't Apple
Your best bets to cash in on the latest iCraze may be with stocks of companies that make parts for it. There are several, and at least one looks like a buy right now.
What is the best way to play Apple and the success of the iPhone 5? I'd suggest that maybe it's not by buying shares of Apple itself.
By buying shares of suppliers to Apple (AAPL) -- what I'd call the Apple sphere-of-influence stocks -- that are also big suppliers to Apple's fierce competitors, such as Samsung Electronics (SSNHY), investors can get the benefit of any return of market enthusiasm for Apple on the company's Oct. 25 earnings report and profit from growth in the smartphone and tablet sectors, no matter which company comes out momentarily ahead.
In this column 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.
More than a single stock
What is Apple?
Of course, it's an individual stock, and a handsomely profitable one to investors who have held it for the past 12 months. Despite the shares' recent correction from the 2012 high of $702 to the Oct. 10 close of $641, Apple's stock is still up 66% in the past 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 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). (Microsoft is the publisher of MSN Money.) It's no coincidence that Apple peaked at $702 on Sept. 18, and the technology-heavy Nasdaq Composite Index ($COMPX) peaked at 3,184 on Sept. 14 and essentially held at that level until Sept. 21. Since then, Apple shares are down 8.7% through the close on Oct. 10, and the Nasdaq is down 4.1%.
Apple's influence on stock prices extends even beyond the effect you'd expect from the stock with the market's biggest market capitalization, though, because Apple is also the center of a web of suppliers, assemblers and retailers. For example, chip-makers 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 happened in recent days. Again, it is no coincidence that shares of Qualcomm have fallen 8.1% from Sept. 18 to Oct. 10, essentially tracking Apple's performance.
I think you can call this set of Apple-linked companies and stocks Apple's sphere of influence. These are stocks whose performance depends, to some degree, 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 Sept. 18-to-Oct. 10 period because of the company's link to Apple. And the shares fell even harder than Apple's 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 win for the track-pad controller worth about $3 per phone.
5 almost-Apple stocks
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.
But Broadcom, to take one example of an Apple sphere-of-influence company, wins when either competitor wins, because it sells chips to both. Broadcom chips show up in Samsung's Galaxy S III, as well as in the iPhone and the iPad. In 2011, Apple accounted for 13.1% of Broadcom's revenue and 10% of Samsung's.
You can see the same overlap of the Apple and Samsung spheres of influence at Qualcomm, which has an overlap with Nokia (NOK) and the Microsoft Windows Phone platform thrown in. Qualcomm's presentation at the Sterne Agee technology conference in May (.pdf file), for example, is illustrated with photos of phones from Apple Samsung, Sony Ericsson, Nokia and others.
But these well-known chip-makers aren't the only companies that participate in these overlapping spheres of influence. For example, Skyworks Solutions (SWKS) and Avago Technologies (AVGO) provide power amplifiers (RF chips) that boost the signals from wireless devices to cell towers. Basic wireless phones have one chip -- at a cost of about $1 -- that allows them to operate on a single network. Smartphones have multiple chips and additional chips as part of their 4G/LTE capabilities. (Skyworks has two chips in the iPhone 5, and Avago has components in it as well.)
This sphere of influence overlap isn't just for chip-makers, either.
One of the more interesting overlap plays is Japan's Tatsuta Electric Wire & Cable, which trades as 5809.JP in Tokyo. Among other things, Tatsuta makes electromagnetic wave shielding film, a thin layer of insulation used in smartphones and tablets. A smartphone 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.
So which to choose?
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. From the Oct. 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 -- 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 Oct. 10 close at $641.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Stillwater shares recover as strike settles
- Why Xylem is looking better
- Price worries in the rare-earth markets
- Nestlé benefits from China wage increase
- Apple's hidden competitive advantage
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any company mentioned in this column. The fund did own shares of Apple as of the end of June. Find a full list of the stocks in the fund, as of the end of June here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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