I told you recently that I’m on the lookout for Bubbled Lousy Stocks to short. Here’s one I’m trying to short right now and am bidding on some puts dated in October and January 2015 with strike prices ranging from $12.50 to down to $10s — JRJC.
It’s a crappy, hyped up Chinese Internet stock that’s popped because the company claims they just became the first online brokers in China. I think this thing will be back below $5 a share by the end of the year. Very speculative to trade this type of stock, either from the long side or the short side, so be careful. But I am indeed trying to build a bit of a short position in this name today as it spiked over $11 a share, up for $5 a few weeks ago and up from just over a $1 a year ago.
Now onto today’s report.
Wearables and the markets they enable will change everything we do in society in the same way PCs and smartphones have. Here is how five of our positions fit into the Wearables Revolution.
INTC – Intel needs mobile traction and needs it sooner rather than later. If they don’t win some major tablet and/or smartphone supply business in the next six months or so, their window into that market gets smaller. It’s high time for Intel’s huge investments in this area over the last handful of years to start paying off for shareholders. Or else it’ll be time to move on. Intel’s actively in the midst of investing tens of billions of dollars in mobile/tablet/wearable and other secular growth industries and if they catch any traction in those marketplaces in the next few years, there’s going to be big upside in both the stock price and the dividend they pay out. In the meantime, you’re making nearly 4x as much interest in INTC as you’d make in a Treasury, and I think INTC’s safer on the downside price risk anyway. Certainly Intel’s potential to triple over the next decade gives you much more potential upside than Treasuries can.
INVN – InvenSense, which, makes and sells micro-electro-mechanical system (MEMS) gyroscopes for motion tracking devices for all kinds of applications including smartphones, tablets…and drones. Drone growth, again, will be huge over the next five to ten years, and this is a company that is likely to have a component or two in many of the drones that will be sold and developed. The company’s got a $1.9BB market cap and there’s a lot of potential upside from there, but with $150MM cash along with $125 million in long-term debt, this stock isn’t as clean as the prior two picks. On the other hand, I’m looking at long-term revenue growth of at least 30% per year and potentially $3 earnings per share by 2017.
The company’s near-term business is being fueled primarily by their gyroscopic motion sensor technologies that they sell into consumer hand-held devices like smartphones and tablets. I think they’ll be a huge direct beneficiary from the Drone Revolution, which is quietly becoming the most important investible trend for Revolution Investors like us.
SNDK – Sandisk’s near-term business is being driven primarily by simple NAND flash memory sales, which are what your smartphones, tablets and many laptops and cable set top boxes use to store data. SanDisk has many patents and receives nice royalties from those patents from Samsung, Micron and others who also sell NAND flash memory components. But, SanDisk has been actively investing in creating ever better, newer ways of applying their NAND flash technologies to make enterprise networking and computing systems work faster and more efficiently.
Their coming ULLtraDIMM solid state drive “closes the last performance gap in current storage infrastructures by placing flash (memory) as close as possible to the CPU (central processing unit) and applications,” SanDisk says. That is going to be a huge business, likely driving billions in new sales in coming years for SanDisk, and at higher margins than their existing businesses. I’m holding my SanDisk and continuing to receive my dividend payments, which are currently yielding 1% a year. I expect that dividend payments will climb over the next few years and I plan to be there along the way for a long while still, as this Revolution Investment that I used to recommend on my TV show when it was at $10, is still positioned for the trends ahead.
AMBA – Ambarella makes chipsets and software that record and transmit/upload HD video. The company’s system-on-a-chip designs integrated HD video, image, and audio processing onto a single chip for delivering video and image quality, differentiated functionality, features, etc.
AMBA is trading at 4x sales and at at 25x forward P/E. With topline growth of 20%-30% a year for the last few and for the next few years. Investors are paying up a bit for this name as video capture and sharing is likely to become a bigger part of just about every connected device we use and own. The company does have nearly $7 a share in net cash, which gives management some financial flexibility. To be clear though, it’s a long way down to “cheap” if the company doesn’t deliver more topline growth in coming years.
AMBA’s chips (which GoPro GPRO cameras use) are less of a commodity than GoPro’s cameras and the other devices you’ll find Ambarella’s chips in. Picture Ambarella as the Intel of HD video recording. Look at the gross margins of Ambarella vs. GoPro to garner an idea of how commoditized their product is. The more commoditized, the lower the gross margins. Ambarella’s gross margins are steady at nearly 70%, while GoPro’s own gross margins have been falling: 52% in 2011, 43% in 2012, and 37% in 2013.
HIMX – A risky way to get exposure to Google Glass and the potential for Google to sell millions of units of them is Himax. Himax makes the eye piece in the Google Glass wearable that I keep raving about. Google actually bought about 6% of Himax back last year when they started buying the eye pieces from the company.
The stock is down 60% this year. While I don’t expect that growing eye piece demand from Google Glass is going to change the direction of the company’s fundamental outlook in the next six months, I do like the risk/reward potential here, as Himax would see its sales and profits explode if it can keep Google’s business as Glass hits the market in the next year or two.
Himax gets most of its revenues right now from selling 3G chipsets to Chinese handset vendors. China is moving to 4G and while Himax does make 4G chipsets, they’re not getting the traction in the 4G market in China that they did in the 3G. I do think there’s a chance that the company’s also catching some traction in the China LTE component market as Chinese smartphone vendors take market share there, but that’s another risk to this investment.