Investing in growth stocks has become very challenging in September. The big, modern names in technology, along with all of the indexed investments and ETFs that track them, have all had some bigger down days. And the “buy now for future performance” argument is getting really tough to swallow, as valuation metrics for the big tech sector are very inflated.
The S&P 500 Index is, of course, significantly more tech weighted at 27.86%, so the big tech stocks are the driver for the index. And as a result, the index — even with the sell-off so far in September — still is at multi-year highs in terms of the value of the index’s members. Check out the price to earnings (P/E) at 25.76 times, the price to sales (P/S) at 2.44 times and the price to intrinsic value (book, P/B) at 3.71 times.
These valuation metrics make it very hard to buy right now for growth, as the index is arguably fully priced based on the expectations for growth in the underlying companies.
And it gets worse when you break out the tech sector from the S&P 500 and look at the resulting S&P Information Technology Index. For the big companies that drive the tech index, the P/E is an eye-watering 31.72 times, the P/S is at 6.09 times and the P/B is at 9.37 times.
Source: S&P Information Technology Index Price to Earnings (P/E), Price to Sales (P/S) & Price to Book (P/B) — Source: Bloomberg
So, if you are focused on tech for your growth – the idea is that you either have to hold your nose and hope that more buyers step up in the belief that the future will justify current super-high values – or you look for growth from tech companies that haven’t gotten notice for what they actually have under the hood.
Old Tech Names, New Tech Profits
Technology is the alchemy of the economy and the markets, and thus it’s the go-to for growth investing. Taking basic materials such as silicon and transforming it into everything electronic or taking the ether in the minds of hoodie-wearing disruptors and making the next must have app — technology gets companies, markets and whole economies from zero to hero.
But technology isn’t something that is eternal. Much was invented in the labs of Thomas Edison and later Bell Labs, but few of those technologies and devices remain in the original forms. Change is what makes technology work. And change is what makes for successful technology companies.
Look at so many leading tech companies of old. Polaroid (the remains now held by private equity for branding) was cutting edge — now gone with digital photography. And in a similar vein, Eastman Kodak (NYSE:KODK) and all of its film and other products went largely the way of the dodo bird, only to somehow temporarily be made into a pharmaceutical company thanks to a now-stalled government contract.
IBM (NYSE:IBM) was a seemingly unstoppable technology company. It had the slogan and mantra of THINK – which I still have on a leather pocket notebook that my grandfather was given by the then-CEO decades ago. but now it appears to be rudderless despite its super computer capabilities — including Watson, that beat the Jeopardy champion.
Others might not be seen as walking dead – but they are leaning. Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC) continue to falter from better competition, and they appear incapable of or unwilling to change.
And then there are others that are changing, or at least trying to. Apple (NASDAQ:AAPL) despite its stock surge, still is locked into the old iPhone. But at least is talking about transforming into a services company. But Microsoft (NASDAQ:MSFT) in my model portfolios of Profitable Investing is the poster child of change. The company went from boxed software with sales tied to PC sales to a global leader in recurring sales of cloud computing and subscription software and services. That has enabled the stock to be one of the better performers in the portfolio, returning over 850%.
But now, I am presenting two companies that have changed and are in mission-critical industries for what’s now and next — and yet, they have not quite been recognized by the stock markets.
This is providing two opportunities to invest in cutting-edge technologies on the cheap. But what makes them even more interesting is that they used to be famous names, but their current strengths have little to do with what they used to be known for.
Remember Mixed Tapes?
Cassette tapes were a big deal decades ago. I remember as a kid in the 1960s when my parents had cassette recorders. We would record family gatherings — we still have some of the resulting tapes, with the voices of grandparents and others that are now sorely missed. And I used to record my piano playing.
The fidelity quickly improved both with higher-quality tape and ferrous metal. And unlike vinyl records, tapes could be made and listened to in various venues, including cars. (And yes, I do know that some car makers did try record players with poor results). there used to be machines I would use to make copies of albums that could be used in my first Sony (NYSE:SNE) Walkman, to listen to on my daily runs.
Others would use them to make mixed tapes of songs for friends or to get a girl’s attention. Philips (NYSE:PHG) is credited with the early tapes. But it was TDK (OTCMKTS:TTDKY), or Tokyo Denki Kagaku Kogyo, with its history of ferrous metal technologies that really made cassette tapes and lots of other music and data storage systems really work — and work on a whole other level.
But while the company’s name is linked to tapes, it has always been a company of change. It moved early on for the development of CDs and DVDs, and then as those became commonplace, it sold its interests there and moved on to silicon chip capacitors and inductors that enable the basic chip to actually work.
It also developed digital solid-state data storage along with the chip products — but again as the market became more commonplace, it sold it and move on.
Its focus is now all about electric power and how to best harness it. And this is where the growth of the newest innovations depends upon TDK right now.
Growth Stocks Giving Power to the People
Now, what are some of the most engaging new technologies right now and those we hope are coming quickly?
Not a day goes by when I don’t see a bevy of discussions about fifth-generation wireless (5G). For my discussion about the evolution of 5G and the collection of companies inside the model portfolios, go to the February issue. What makes 5G work is a collection of technologies that all have to come together to make it all happen.
TDK is mission critical, with its power management and power supply products. Each antenna has to have power management that takes wired alternating current (AC) and makes it work with DC powered electronics. The capacitors and inductors that TDK has developed are at the forefront. And its products are considered the best.
Meanwhile, smartphones need batteries that quickly charge, evenly power and don’t overheat and explode. TDK is one of if not the leading battery maker for these devices. And it also provides the voltage temperature management and sensor devices so that your pants don’t catch fire.
Phone sales as 5G begins to roll out are creating a surge in demand for TDK products. And then there are the tablets and laptops too. The top three makers — Lenovo (OTCMKTS:LNVGY), HP (NYSE:HPQ) and Dell Technologies (NYSE:DELL) — have reported that they are short millions upon millions of laptops, with order backlogs citing delayed production as well as remote work and remote learning conditions.
That is another wave for TDK.
Beyond 5G, electric cars and autonomous cars are other technologies that get daily attention. Traders bid up companies such as Nikola (NASDAQ:NKLA) — which subsequently fell with the reality that it didn’t have the goods to go — and Rivian Automotive (private-ish) in the just off-stage of the stock markets. And Tesla (NASDAQ:TSLA) of course is a cult-stock that appears to defy the gravity of financials.
But every maker has electric cars now or in development. And what they all have in common as well as with hybrid cars and even mild-hybrid systems found in Porsche, Audi (OTCMKTS:VWAGY) and other cars are the common products of TDK.
Capacitors and inductors receive, store and transmit the power that makes all of these products move and stop. And those voltage monitors noted that keep phones from exploding — yep — those are even more critical for cars.
What also makes electric cars move are magnets. TDK has developed the go-to magnets. And storing that power takes lots of batteries. Again, TDK is a big leader here. And while lithium and still lead in some cases remain the go-to means for batteries, solid-state batteries are what’s going to really solve for electric cars and trucks to power up more quickly, hold power more efficiently and not create massive environmental devastation that’s occurring now on a daily basis.
Yep, TDK (along with Samsung Electronics, SSNLF/005930 in the Niche Investments portfolio of my Profitable Investing) is a leader developing and already deploying them.
Now, on to autonomous cars. Right now, one of my cars can pilot itself in traffic on a limited basis as well as starting — and most importantly, stopping — when it has to do so. While the controls and systems make the car a whole lot safer for me and my dog Blue, they are like most of the rest of the autonomous controls in the current market — stepping stones.
There are all sorts of sensors on cars right now that are part of the autonomous developments, and TDK has patents for a lot of them. It also continues to sell more of them, including its acceleration sensors and gyro sensors that help cars “see” where they are and where they are moving.
Way Beyond Japan
The Japanese economy has been severely challenged for decades. The financial messes in its banks and financials from back in the 1980s has really never been completely cleaned up. And subsequent regional and international fiascos, including the Asia Crisis of 1997 and the 2007-2008 mess, still leave major wounds. In addition, its demographics are also challenging, as it is increasingly an older-aged population, leading to a need for workers now and going forward.
Fortunately, TDK has changed ahead of the times for Japan. About 90% of its businesses are done outside of Japan. And China is a big part of the footprint of the company, as is the rest of Asia, as well as Europe and the Americas.
Source: TDK Revenue — Source: Bloomberg
Revenue from its myriad must-have technological goods continues to rise with the past 10 years showing a consistent climb with an annual average running at 4.29% (CAGR). Margins vary, of course, across its highly diverse collection of products. They range from basic components to class-leading mission-critical items. But overall operating margins are good at 7.2%. And in turn, that works to deliver a return on equity which compares well with Japanese peers at 6.6%.
Source: TDK Total Return — Source: Bloomberg
The company has plenty of cash, with current liabilities covered by 130%. And debts are minimal, at only 23.70% of assets. This provides the ability to borrow if needed to invest in developments. But given the revenues and the retention rate of 60.60% of earnings – it has been highly successful at self-funding its pipeline of innovations.
But it does pay its shareholders with a yield of 1.40%.
The real attraction beyond all of the must have components and systems is that the stock is valued at close to just the amount of revenue produced over the trailing year with the price to sales at 1.10 times. And its intrinsic value of a book of highly-difficult factories and patents is priced in the stock market at only 1.68 times book. This is a bargain stock for what is under the hood.
The shares have returned 98.2% over the past five years for an average annual equivalent of 14.65%. But not without some ups and downs. I see that there are a lot more ups coming as folks learn more about what the company is and not what it was decades ago.
It is a buy in a taxable account, as it is in my Niche Investments portfolio of my Profitable Investing.
Back in the 1980s and 1990s when you left the office, you were at risk. You had your ever-smaller brick mobile phone from Motorola (NYSE:MSI) and then ever better devices — but email was a challenge. I remember going through a litany of devices from Palm (what’s left of that is inside HP) to Kyocera (OTCMKTS:KYOCF) and they each kind of worked — but nothing like BlackBerry (NYSE:BB). I became plugged in wherever. And from Central China to Russia, Latin America — even at sea, my BlackBerry devices always worked. And they worked with absolute security with data compression that made them work even with barely a single bar of coverage.
But while their devices did the heavy lifting, they weren’t up for games and posting odd photos of celebrity chef plates and cat videos like their peers from other companies.
BlackBerry was dumb enough to blow its advantages for mobile devices, but like for TDK, it was smart enough to invest in and developed a myriad of technologies, products and services that today make for a completely different company.
Internet of Things & Thieves
Today, BlackBerry doesn’t make a single phone. It instead provides the software and security for communications of voice and data for industries ranging from cloud computing companies such as Amazon’s (NASDAQ:AMZN) Amazon Web Services, or AWS, and Azure from Microsoft to power grid operators and power generation companies, robotic operations of manufacturers and 90%+ of automakers.
For the first quarter of 2020 alone, according to analysis by Momentum Cyber, there were on average 55 cyberattacks every second of every day 24/7. And that’s what has or could have been tracked. The internet of things meaning that devices from your Amazon Alexa or industrial robotics or the myriad of others are at risk.
Adding to the risk is the surge in remote work, which is becoming the post-pandemic model that leaves everything from business email and websites to my Bloomberg Terminal at risk.
BlackBerry, through its own inventions and acquisitions including Cylance last year, has built up a horde of approaching 30,000 patents with more than 1,000 more in application and more to follow.
At its core, it provides secure connections that are used by 77% of the Fortune 100 companies to make everything work while staying locked down.
And like for TDK, the rapidly advancing 5G communications and autonomous vehicles markets are increasingly dependent on the products and services of BlackBerry. For 5G, the data communications in larger amounts at faster speeds with lower latency means that thieves have more to steal. And for systems to work quicker and better, they need to be secure so they aren’t bogged down wondering if they are hacked or not.
The Automotive sector is where BlackBerry has a long history. Its QNX software platform is embedded in many modern cars, running everything from infotainment systems to advanced driver assistance systems (ADAS) – the safety stuff that utilizing hardware from the likes of TDK makes semi-autonomous cars safer.
But to make autonomous cars work, they need to communicate in real time all of the time with each other to make everything work so that no one dies. BlackBerry is already here with the systems for this. With its embedded systems and software and the security, it really doesn’t have a peer for the autonomous car communications market.
Great Stuff, Bad Name
Like for TDK with its blast-from-the-past name, BlackBerry isn’t getting the full attention to what it is over what it was. Now granted, it did have a licensing agreement with TCL (OTCMKTS:TCLHF) to allow it to make BlackBerry phones with security from the company on the Android platform of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) which I use 24/7. And while that has expired, it has a new license deal with U.S.-based OnwardMobility (private) which has a Foxconn (OTCMKTS:FXCNY) subsidiary called FIH Mobile to manufacture it. I’m in line right now to buy.
But that is a sideshow — as the company really has moved on as noted above to more vital technologies.
BlackBerry is trading under $5 a share which values all of the patents, products and services all of the huge clients around the globe valued at peanuts. The price to intrinsic value (book) is only 1.38 times – which is a tiny fraction of companies in this high-tech stratosphere. And it is only valued at 2.6 times its trailing sales, which are up by 15% over the past year.
The company has lots of cash and debt is very, very low at only 19.50% of assets. But it needs some management improvements to shore up profits along with its growth in its assets and revenues. It looks like a high-tech flier — but without the stock market fanboys.
I’ve been following it for a long time. I see it as an ideal takeover candidate or to be taken private by private equity, or perhaps a special purpose acquisition company (SPAC). And with its cheap valuation and low stock price — it should be a target with the slew of new day traders.
Source: BlackBerry Stock Price — Source: Bloomberg
This isn’t a usual type of stock for me to recommend. But I see so much value in its assets and its book of business as well as in its prospects with security and systems for so many got to have developments including 5G and autonomous and other higher-tech vehicles that I am going to recommend it with the guidance to buy only in smaller sums in a taxable account as it is in the Niche Investments in my Profitable Investing.
On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
About Neil George:
As the editor of Profitable Investing, Neil George helps long-term investors achieve their growth & income goals with less risk. With 30+ years of experience in the financial markets, Neil recommends undiscovered and underappreciated companies that offer subscribers double-digit yields now and triple-digit returns over time.
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