A stock that rises as Apple falls

Spreadtrum Communications is a leading supplier to Apple's rivals in the smartphone market. Buy this stock if you think competitors will continue to gain market share.

By StreetAuthority Mar 19, 2013 9:59AM
The headquarters of Spreadtrum Communications in Shanghai © Kevin Lee/Bloomberg via Getty ImagesBy Michael Carr

Apple (AAPL) is down nearly 35% over the past six months, making it one of the worst-performing stocks during that period. This rapid decline has also led many traders to question whether the stock, after falling this  far, is a "buy." 

In my opinion, it might be best to look beyond Apple for profits.

No one knows for sure what is behind the sell-off in Apple's stock. It could be concerns about slow growth and threats to market share in the smartphone market. Apple's iPhone accounted for 56% of the company's revenue in the mos-recent quarter.

At first glance, the iPhone seems to be well-positioned. Total iPhone shipments increased by 47% in 2012 to 136.8 million handsets. Apple had 25% of the global market share, an enviable position but far below the 40% share of first-place Samsung Electronics (SSNLF).

This data suggests that rather than trying to find a buying point in Apple, traders should consider finding companies that will profit if the iPhone loses market share. After all, given the iPhone's market share, we can calculate that more than 400 million smartphones from other companies were sold in 2012. Samsung is one possibility for investors, but the stock is thinly traded in the United States and should be considered only by long-term investors.

Suppliers to Samsung, like Spreadtrum Communications (SPRD) could actually be among the best ways to profit from Apple's declining market share. This Chinese company is the world's fourth-largest manufacturer of baseband processors, a key component of smartphones.

Spreadtrum is also the leading provider of broadband processors to China's domestic smartphone market, the largest in the world with more than 700 million subscribers. The company is a leading supplier to Samsung, HTC and others cutting into the iPhone's slows.

Demand for smartphones has allowed Spreadtrum to grow rapidly. Earnings per share have increased at an average annual rate of 70% in the past five years, while sales grew an average of 45% a year during. Analysts forecast per-share earnings to increase by 22% this year, 16% in 2014 and 6% a year in the following five years.

The expected slowdown could be one of the factors making Spreadtrum a bargain. The stock trades at a price-to-earnings ratio of just 7.8, compared to rivals' average P/E of 14.

The chart below suggests that the risk of buying Spreadtrum is relatively low. On the weekly chart, the stock is completing a rounding bottom pattern and moving above the 20-week moving average. Stochastics are bullish and confirming the price action.

For a trading strategy we can turn to the monthly chart. Here we see a potential double-bottom pattern forming and stochastics has just completed a buy signal. Resistance near $23 was established late last year and offers a profit target about 28% above the current price. Support at $15 defines the risk on the trade, about 16% below current levels.

In the past, buying after a stochastics buy signal on the monthly chart and holding the position for one year would have been profitable, with an average gain of 100% during the short trading history available on Spreadtrum. That statistic adds confidence to the trading strategy, but the target based on that test seems unlikely given the significant resistance near $23 and the slowing EPS growth.

Spreadtrum looks like a company positioned to profit from Apple's troubles. Even if Apple recovers, Spreadtrum is trading at a bargain price and should deliver strong gains to traders in the next year.

Action to Take: Buy SPRD above $17.50, to ensure the uptrend is continuing. Set stop-loss at $15. Set initial profit target at $23 for a potential 28% gain in 6-12 months.

Michael Carr does not personally hold positions in any securities mentioned in this article. This article originally appeared on StreetAuthority's sister site, ProfitableTrading.com. 

More from ProfitableTrading:
Mar 24, 2013 2:45PM
mr. carr ... you said:  "samsung ... is thinly traded in the u.s. " ... no, sir ... samsung is NOT traded here ... it is trading in south korea ... we've got to be "accurate" when giving out info.
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