A Second Chance to Buy Intuitive Surgical

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On Feb. 28, a few minutes before closing, a single research paper sent Intuitive Surgical (NASDAQ: ISRG) tanking from the $570ish range to under $500. The widely circulated paper concluded that overall outcomes in hysterectomies using Intuitive’s Da Vinci robot were no better than laparoscopic surgery — and that the robot option was more expensive. Read the paper here. Critics of the paper say its authors did not consider faster recovery times.

When that fall happened, I doubled my exposure to Intuitive Surgical. The next day, the stock recovered, but not to previous levels. Then last week, Intuitive found a new source of criticism – the president of the American Congress of Obstetricians and Gynecologists — causing the stock to go even lower, into the $450s. However, there are plenty of surgeons holding opposing views in favor of robotic surgery, as evidenced by this response from a group of OB/GYNs.

Keep in mind that all this hullabaloo is limited to hysterectomies, one area in which a non-robotic, minimally invasive laparoscopic option is available to compete with Intuitive’s robosurgeons. Also, the robot doesn’t perform the operation all by itself; it’s a system to give doctors more fine-grained control and better visibility from a much smaller incision. In short, DaVinci’s system is just a better way of performing laparoscopic procedures.

In any case, this is the future, and even though the robotic option is more expensive now, that’s the price for new technology. In most cases where the robot is used, it is a better, less invasive option with faster recovery times. The use of the Da Vinci system is only expanding, and will continue for a while as more surgeries are approved to be performed using the system, and more doctors and hospitals obtain the system and get trained in using it.

So why were investors so spooked? In its Q4 2012 conference call, Intuitive said that OB/GYN and general surgery were responsible for most of its growth, and benign hysterectomy was amongst the largest individual contributors to its procedure growth. Also, hysterectomies accounted for 80% of GYN procedures. So a slowdown in adoption of the robot for GYN procedures could put a dent into the growth of the company.

The da Vinci robot is a general purpose surgical robot and even if GYN growth slows down other procedures will eventually lead to growth. In my opinion any impact will be temporary.

The other robots from Mako (NASDAQ: MAKO) or Hansen (NASDAQ: HNSN) are special purpose robots. Mako’s is only for bone related issues such as Knee and Hip resurfacing or replacement. Hansen’s are specifically for catheterization and use intra-vascular surgery.

So take this chance to acquire the stock of a fast-growing company with no real competition representing the future of surgery under $500.

Investing in India – ADRs

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In part 1 of this series, I covered ETFs that invest exclusively in India. In part 2, I covered CEFs and mutual funds. In this article, I’ll look at ADRs’ premiums or discounts vs. their underlying securities, and talk about Indian technology ADRs.

Lets start with a list of all ADRs and their relation to the underlying stock.

Company Stock Quote (INR) ADR Quote (USD) ADR Premium/Discount %*
Dr. Reddys Labs 1800.55 33.88 2.21
HDFC Bank 675.30 39.84 6.43
ICICI Bank 1121.70 43.17 4.38
Infosys 2776.55 51.40 0.61
Rediff N/A 2.94 0.00
Sify N/A 2.03 0.00
Tata Motors 305.80 27.86 -0.98
Sterlite Industries 101.00 7.39 -0.59
TCL 233.45 8.11 -5.93
Wipro 402.10 9.20 19.58
WNS N/A 14.39 0.00

*As of Friday, Feb. 15.

As you can see, most Indian ADRs are trading at a premium to their underlying stock in India, with the largest premium belonging to Wipro. Four of the 11 companies are technology companies: Infosys (NYSE: INFY), Rediff (NASDAQ: REDF), Sify (NASDAQ: SIFY) and Wipro (NYSE: WIT). Let’s look at these in more detail.

 

Only Wipro and Infosys seem to be consistently growing revenues.

 

EPS trends paint a similar picture of consistent growth only by Wipro and Infosys. The data for Sify was missing at YCharts, but the company posted a loss in its fiscal year ending 2012, albeit a smaller one than it recorded in 2011.

 

The stock prices of both Wipro and Infosys have not kept up with either their EPS or revenue growth, which currently reflects of the Indian stock market as a whole. So 2013 is a good year to invest in India, in spite of its slowing economic growth.

The valuations of stocks, especially of those like Infosys and Wipro are likely to catch up with their growth rates. But is Wipro worth the premium over the underlying stock when compared to Infosys? The current P/E of Wipro is around 18, and Infosys around 16.

I would say no. Among the Indian technology ADRs, I recommend Infosys, which is currently undervalued compared to its five-year average P/E of 20.

Stay tuned for coverage of the rest of the Indian ADRs.

Investing in India – CEFs and Mutual Funds

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In the first part of this series, I covered investing in India via ETFs. In this section, I will cover CEFs and mutual funds.

There are two CEFs (closed-end funds – essentially, managed funds that trade as stocks) that invest exclusively in India.

Fund Adjusted Expense Ratio Discount to NAV
The India Fund (NYSE: IFN) 1.01% 11%
Morgan Stanley India Investment Fund (NYSE: IIF) 1.38% 12%

Both funds are very comparable. Their holdings are similar, except that The India Fund has a higher concentration of large caps than Morgan Stanley’s fund. Their returns are very similar, with The India Fund having a slight edge in long-term annualized returns.

In the last few years, returns of the Indian market have trailed those of the US market:

 

Whenever this happens, the discount of the Indian CEFs steepens. So the six-month average discount for both funds is a lot higher than the three-year average discount.

Fund 6 Month Average Discount 3 Year Average Discount
IFN -11.63 -8.09
IIF -11.66 -8.42

This discount to NAV makes now a great time to buy into either of the CEFs.

There are three mutual funds that invest in India:

Matthews India Fund – MINDX – This is a very good fund to invest in India with. It has a low expense ratio of 1.18%. It is a no load fund with a minimum investment of $500 for IRAs and $2500 for regular accounts. It is rated 4-star by Morningstar and its performance has been better than both the CEFs.

Eaton Vance Greater India Fund Class A – ETGIX- This on the other hand is pretty poor. It has a front end load of up to 5.75%, expense ratio of nearly 2% and poor past performance compared to MINDX and deserves the 1-star from Morningstar that it gets.

Eaton Vance Greater India Fund Class B – EMGIX – This is closed to new investors, but is similar to ETGIX except that the load is a back end load instead of a front end load.

In conclusion, among the options to invest in India we’ve covered so far, you have good choices in ETFs, CEFs and mutual funds, depending on your preference. But as of now, these closed-end funds present a good opportunity to get in while they’re trading at significant discounts.

Disclosure: Long IFN

Investing In India – ETFs

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India is one of the major emerging market economies. The Indian stock market is well established and the roots of the Bombay Stock Exchange (BSE) go all the way back to the mid 1800s, making it the oldest in Asia. It is the 10th largest stock exchange in the world by market cap, and the No. 1 in the world based on number of listed companies – around 5,000. The other large Indian Exchange, the National Stock Exchange (NSE) is the 11th largest in the world by market cap.

And even though the Indian indexes are correlated with emerging market indexes, they are not significantly correlated with American indexes. India presents a good way to diversify your portfolio by investing in a major emerging market with well-established exchanges in a democratic government.

Until recently, there were not many options to invest in India. However, in the last few years, investors in the U.S. have gained several ways to invest in India: ETFs, CEFs, one ETN, regular old mutual funds, and individual ADRs. For this first article, I’ll focus on broad market index ETFs that focus on India, and ignore the specialized and leveraged ones. That list boils down to…

EPI WisdomTree India Earnings Fund
PIN PowerShares India Portfolio
INDY iShares S&P India Nifty 50 Index Fund
INDA MSCI India Index Fund

Let’s look at these in more detail.

ETF Morningstar Rating CAPS Rating Expense Ratio Index Tracked
WisdomTree India Earnings Fund (NYSEMKT: EPI) *
0.83% WisdomTree India Earnings Index
PowerShares India Portfolio (NYSEMKT: PIN) *
0.79% Indus India Index
iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) ***
0.92% S&P CNX Nifty
MSCI India Index Fund (NYSEMKT: INDA) n/a n/a 0.67% MSCI India Index

How the indexes work

The Wisdom Tree index is an earnings-weighted index adjusted by availability of shares to foreign investors. It consists of 220 companies, all of which are profitable.

The Indus India index is a proprietary index with 50 components chosen from a universe of the 200 largest companies by market cap on the BSE and NSE.

The Nifty is a market cap-weighted index of Indian equities, consisting of 50 Indian large caps covering all market sectors. These 50 companies comprise two-thirds of the market cap of all stocks listed on the NSE.

The MSCI India Index consists of 73 components and covers 85% of “the indian equity universe”.

Essentially even though their numbers of components are different, all these indexes represent a similar collection of large-cap Indian stocks.

INDY and INDA are relatively new, so it is difficult to do a comparison with charts. However, we can substitute the iPath MSCI India Index ETN for INDA, because they track the same Index. For the purposes of this article, the differences between ETFs and ETNs can be ignored, except for one: The ETN tracks the total returns of the index and doesn’t pay a dividend, so it is relatively tax-advantaged.

ETF Morningstar Rating CAPS Rating Expense Ratio Index Tracked
iPath MSCI India Index ETN (NYSEMKT: INP) *
0.89% MSCI India Index

Now we can do some comparison.

 

I’m not exaclty sure why Morningstar has decided to give INDY a three-star rating, while the rest get a one-star rating because if you look at the “Funds in Category” total, Morningstar says 4. So among the four very similar ETFs that it ranks, Morningstar has decided that one is three-star, and the rest are one-star. In this case, however, the choice is simple: Just ignore Morningstar.

Here is what to do. If you don’t care about paying taxes on dividends or getting them paid as cash, pick the lowest expense ratio fund. Otherwise, pick INP.

Disclosure: Long INP

Rethinking Apple and Amazon – All About The Cash

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Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) could not be more different in their corporate philosophies regarding profits and cash. Amazon spends almost every dime it earns, keeping the net profit down as close to zero as possible. Apple, on the other hand, keeps most of it as cash that just sits around doing nothing. As an investor, one would like some kind of balance of cash hoarding, returning that cash to investors, or reinvesting it in the business. So these two extremes make an interesting comparison considering the market reaction after earnings season: Amazon continues to rise, while Apple continues to drop.

So far, I’ve been of the opinion that Apple is a better investment, because it makes money — lots of it. However, Apple just hangs on to it, and then it does nothing for the company. Apple just started giving a minimal amount of that cash back to investors via dividends and buybacks, but not enough.

Also, Apple invests less in R&D (notice how even troubled Nokia outspent Apple) than most of its competitors. So it’s not even investing seemingly enough of its money back into its own business.

In fact, every few days someone writes an article on how Apple can use their cash better. Even I can think of a few suggestions, like doubling its dividend, becoming vertically integrated like Intel, or investing more in different lines of products or faster product update cycles. Not pursuing this latter strategy, and sticking to its guns on fewer product options, had been costing Apple market share to Android devices, which offer more size, storage, screen, and technology options.

Now, Amazon, on the other hand, has relatively little cash on hand. It chooses to invest heavily in expanding its infrastructure. Logically, the primary reason to run a business is to make money. If you are running a business for that purpose, the best thing to do with money earned would be to invest it back in the business — exactly what Amazon has been doing, and exactly the opposite of Apple. Most quarters, Amazon revenue is growing faster than the growth of overall online retail, which means it is taking market share.

Looking at both the stocks from this perspective, Amazon can look like a better investment, because it seems to believe in its business more than Apple does. Of course, Amazon is an extreme case. Most tech companies hoard cash. But almost everyone seems to be managing it better than Apple.

Just to see whether this theory held water – I made a chart looking at gross profits instead of net — because as far as Amazon goes, its microscopic net margin doesn’t seem to matter to investors. I’m generally all about the net profit, but to offer some insight into Amazon’s meteoric stock price, maybe the gross profit will work better.

Looking at the chart, Amazon looks like it is increasing revenues and gross profits, while consistently keeping constant gross margins. Amazon doesn’t look bad at all until you factor in the net income.

So Apple has Amazon beat in everything except stock price. This means that as far as Amazon is concerned, this extreme spending for expansion at the expense of current profit is desirable to investors, because Amazon is doing something useful with its cash. And that means that everybody expects Amazon’s strategy to pay off at some point. Amazon does have a lot of room to grow, which might be true considering their revenue is still only 12% of that of Wal-mart.

So even though subjectively there might be some logic to “Amazon misses but stock soars“, there is relatively less logic, looking at the chart, to Apple’s stock drop. However, looking beyond the chart. Apple can be seen as the opposite case of Amazon.

In spite of having more cash than it could ever need, Apple is losing marketshare to the plethora of Android devices. Apple possibly needs to spend more and get ahead, instead of resting on their existing laurels. So you could say that their cash is mismanaged. They have too much, and are neither giving it back to investors, nor investing it in their business.

I’m still long Apple for now, and avoiding Amazon, though. I’m not sure how long Amazon can continue making no money . It has been going at this strategy for a long time, and it is time to start making more money. Apple seems to learn its lesson, just like it did with the iPad mini. There’s still plenty of market for Apple to enter into, even with existing products.

Disclosure: Long AAPL, INTC, NOK

Investing in the Future of Mobile Devices Part 2 – Components and Software

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In Part 1, I covered a couple of device makers along with CPU and graphics chip makers. In Part 2, I’ll cover software and the components that matter the most.

After all nobody cares if they have a dual core or quad core or 1GHz or 1.5GHz processor other than geeks like me. What people care about is how cool the display looks and how easy is it to get to the features they use most or what software ecosystem.

Let’s start with screens. There are few screen manufacturers that can make mobile device screens in large volumes. They are Samsung, LG, Sharp and Japan Display. Japan Display is a jointly owned by Innovation Network Corp of Japan, Sony, Toshiba and Hitachi. Samsung is the largest maker of mobile displays amongst these, followed by LG. Sharp as a company is in trouble but they do have good screen technology and potential investment suitors in the form of HonHai/Foxconn and Apple. Samsung Display was recently spun off as an independent but still wholly owned subsidiary of Samsung Electronics. LG Display (NYSE: LPL) is a publicly traded company but it is 38% owned by LG Electronics.

Next up – memory. This is just one more category (NAND Flash) where Samsung is the largest manufacturer. This is getting to be a theme. Samsung is the world’s largest manufacturer of a lot of things. Anyway next in line after Samsung are Toshiba and Micron (NASDAQ: MU) and SK Hynix. Micron is quickly closing in on second place Toshiba as it breached the 20% market share barrier last year.

As for Flash cards, Sandisk (NASDAQ: SNDK) is the largest manufacturer followed by Samsung, Toshiba, Transcend and Kingston (2011 rankings). Flash manufacturer rankings are a complicated mess which is evident from the glaring absence of Sandisk from the general NAND flash rankings above. So it all depends on how you look at it.

Other than Flash Memory (the quoted number 8GB, 16GB, 32GB etc. for phones), phones also have RAM (which is similar to the memory on your computer). Another top spot for Samsung, followed by SK Hynix, Eplida and Micron. So the same old. Which is strange considering the top spot for all DRAM (including PCs) is held by Kingston.

 

The five year chart for all US traded companies mentioned above shows memory makers faring better than LG Display. However, looking at their income growth doesn’t look promising. The stock prices have been rising a lot faster than income.

 

Let’s look at operating system software next. Smartphones and tablets run mostly on iOS and Android. The other operating systems in the running are Blackberry, Windows, Symbian and Samsung Bada. Nokia still makes Symbian phones but is slowly turning that into the featurephone OS and Windows into their smartphone OS.

As iOS and Android dominate and Microsoft tries to muscle in, the future of anything else including Blackberry is uncertain. So investing in the future of mobile software presents you with the obvious choices of Apple and Google along with Microsoft. I would consider Research in Motion (NASDAQ: RIMM) a risky proposition until Blackberry 10 devices hit the market at which point the response to those would be a good judge of the continues survival of the company. If the reaction is anything like the reaction the Windows Phone 7, that would spell doom for RIMM. Symbian is officially being gimped as Nokia is betting on Windows. In fact as of now even the future of Nokia is uncertain, but they just might make it. I will not bother you with the depressing charts for either of them but lets just say you should avoid them unless you have a tolerance for risk. Let’s just say Apple, Google and Microsoft, all of which I’ve covered previously are your only real choices for investing in software.

In Part 3 I’ll cover more device makers and mobile applications.

Disclosure: Long AAPL, GOOG, NOK

Analyzing Apple’s Guidance

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In Apple’s (NASDAQ: AAPL) Investor Conference Call, CEO Tim Cook and CFO Peter Oppenheimer talked about the company’s new method of issuing guidance. This is what their release said:

Apple is providing the following guidance for its fiscal 2013 second quarter:

• revenue between $41 billion and $43 billion
• gross margin between 37.5 percent and 38.5 percent
• operating expenses between $3.8 billion and $3.9 billion
• other income/(expense) of $350 million
• tax rate of 26%

When asked about the range as opposed to the point guidance, Peter Oppenheimer said that Apple will be within the range “as best as they can” so the range is no longer the conservative guidance that we are used to. This is a welcome change as it will hopefully end the guessing game every quarter.

The one thing missing compared to previous quarters is EPS guidance. But Peter Oppenheimer told Gene Munster of Piper Jaffray that he could figure out the EPS from the numbers above. Walter Piecyk of BTIG has done the math for us and come up with $9.23 – 10.23. This is a bad sign for Apple and not including the number was in poor form.

The conference call twice eluded to being able to sell more if they made more. Now personally I call that an ego problem at Apple causing them to shift away from Samsung. Steve Jobs is dead. Time to stop the war against Samsung (and Android in general). In fact there were several other ego related tidbits in the conference call such as

The iPhone 5 offers as you know a new 4-inch Retina display, which is the most advanced display in the industry and no one comes close to matching the level of quality as the Retina display. … So, we put a lot of thinking into screen size and believe we’ve picked the right one.

- Tim Cook

When other phones start getting 5″ 1080P screens, the retina display on the iPhone5 is outdated. In fact it is even outdated compared to old previous generation phones with 720P displays like the Galaxy Nexus. Also, whatever they believe, people want choice. The Apple attitude – “if you want the latest features get the biggest phone” is probably causing people who like smaller screens to stick with the older iPhone 4S. People want all sizes with the latest specifications. And people who are already used to and prefer larger screens will not convert to the relatively tiny iPhone screen with a lower resolution.

Also it is enough to mention it once that you make the best products. In the conference call Tim Cook mentioned “very best products in the world,” “best customer experience in the world,” “best work of their life,” “create the world’s best product,” “our best products ever,” “best products in the world,” “only the best products.” So best was used over and over. In addition to that we had “unprecedented,” “unmatched,” “stunning,” and other synonyms. Enough already. We get it.

If we are to believe this guidance, the exponential growth of Apple will not apply to next quarter at least as far as EPS is concerned. However the stock price reaction to the earnings is completely unjustified – I predicted a drop to $450 if Apple misses in my pre-earnings article. This would be a good time to buy some Apple stock. For a company that carries a cash pile of $137 billion and is expected to make a profit of around $45 billion in 2013, the stock is significantly undervalued compared to peers like Google and Amazon.

Growth at the midpoint of $42 billion in revenue would be 7% over the same quarter last year and EPS would actually be lower by 20%. That is what spooked investors even though the reason for this is simple – more growth in emerging markets means gravitation to lower margin products. This quarter was the first in at least 16 quarters where Apple’s EPS was lower than the same period in the previous year. And next quarter might be the first ever significant decline.

However with the introduction of newer generation products, I expect that the EPS will grow after next quarter. I still maintain that it is a good buy at the current $450 level.

Disclosure: Long AAPL, GOOG

The Game of Predicting Apple’s Earnings

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Every quarter there are hundreds if not thousands of articles and posts from amateurs and professionals alike predicting Apple’s (NASDAQ: AAPL) Earnings. Most of them are based on attempting to estimate how many iPhones, iPads, Macs, etc. Apple sells, and in the process attempting to predict component costs, and margins. Then these articles seem to make some kind of model to forecast Apple’s earnings based on a complex set of data that is hard to predict.

Sometimes analysts and bloggers have help from other sources like announcements from carriers about the number of iPhones sold. Sometimes rumors are the source of the predictions. However, for many quarters after the iPhone first launched, Apple managed to beat even the most optimistic numbers. This caused analysts and bloggers to set even loftier expectations on Apple, which Apple then proceeded to fail to meet partially causing the stock to drop. However Apple has been pretty consistent when it comes to beating their own numbers. For a previous article I made this chart and here will analyze it further to try to get a better view of predicting Apple’s earnings and join the prediction bandwagon.

So this shows that Apple is getting less conservative in their guidance, but still consistently beating their own estimates. Just based on this chart and using a 20% EPS beat and a 10% revenue beat we’d have predictions of $14.10 for EPS, and $57.2 billion for revenue.

Let’s look at another chart of their actual revenue and EPS:

The trendline numbers in this case are $46.5 billion in revenue and $14.20 EPS. Now the $46.5 billion in revenue is too low, so Apple will likely blow past this trendline just like last year where the Q4 number of $46.3 billion is way past the trendline number of $32 billion. However if you look at the EPS number of $13.87, that is also way past the trendline number of 8.75 in Q4 2011. If we assume $57 billion in revenue as above, keeping margins consistent we would have EPS of $17.

This implies some kind of change from Apple – a very low EPS for what is a very high revenue. That implies some kind of margin contraction. There are many theories about the problem amongst which the most prominent is “poor” iPhone5 sales. I put poor in quotes because poor is relative. Analysts expected Apple to sell 65 million iPhones in this quarter which have since been revised downwards to 43-63 million. Hence “poor.” Neither 43 million nor 63 million is in any way a poor number. But nobody has yet provided a convincing reason for the margin contraction. Initially my own reasoning for that was manufacturing difficulties of the iPhone 5. But now I believe that it is possibly a combination of factors the most important of which is the iPhone and iPad mix.

Apple severely overcharges for their middle model and slightly overcharges for the top end model. For example the 32GB model of the iPhone costs $100 more than the 16GB model. This $100 provides only an extra 16GB. However the 64GB model which provides an extra 32GB also costs another $100 more. Now as developing market sales become more responsible for Apple’s growth, the product mix will move towards the cheaper device that has comparatively lower margins.

However, knowing how conservative Apple is about numbers, we should assume that the numbers cover the possibility that the iPad mini was a dud. The iPad mini can be assumed to be a high margin device because it is made from older cheaper components and is far more expensive than the competition. The sales numbers are unknown and when the device was launched, Apple failed to separate iPad mini numbers from iPad numbers for initial sales. However based on current rumors the device was a success.

So I think the margin fears are overblown. So let’s say we stick with trendline numbers for EPS to be on the conservative side – $14. And if we are super conservative about the revenue, lets say Apple only beats their own estimate by 5%, we’d have $54.2 billion in revenue. Even these conservative numbers would imply great continued growth. Apple is of course likely to beat these numbers and my hope is for somewhere between $14-$17 EPS, and somewhere between $54 and $57 billion in revenue.

Looking beyond this quarter just based on the EPS and revenue trendlines, FY 2013 earnings would be $69/share on revenue of $214 billion. However, I feel that depends on Apple being able to produce devices that actually catch up and leap beyond the competition soon. The iPhone 5 and iPad mini were fairly poor specifications-wise, and newer larger phones from the competition and cheaper better specced tablets will provide significant competition. This is especially true because Apple product cycles are longer and Apple more often than not avoids newer technologies (like they are currently avoiding NFC, wireless charging and they previously avoided both 3G and 4G for a while). Also beyond the next year Apple’s continued growth depends on entering new markets.

Now the average analyst estimates for EPS is $13.41 ($11.97-$15.50) and revenues of $54.70 billion ($52.29-$59.55). If Apple misses, I think the stock would drop down to the $450 level. I find that event unlikely, but I have been wrong.

Disclosure: Own AAPL

Investing in the Future of Mobile Devices Part 1 – Hardware

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However, device makers are not the only beneficiaries of the ongoing smartphone and tablet boom. The companies that make the phone and tablet innards are worth looking at, and I’ve dug up the gems for you. Currently most mobile devices use processors based on technology licensed from ARM (NASDAQ: ARMH). Manufacturers like Apple and Samsung make their own ARM-based processors, like the Apple A series and the Samsung Exynos. However, most other device makers rely on processors from Qualcomm (NASDAQ: QCOM) and NVidia (NASDAQ: NVDA).

For 2013, Samsung expects to launch the first 8 core mobile processor called Exynos 5 Octa, based on ARM’s big.LITTLE technology, which pairs four low power cores with four performance cores to provide the best of both worlds–good battery life and performance–when required. Qualcomm announced their next generation of processors – Snapdragon 800 – which provide significantly better performance, including support for mind boggling image sizes like 55 megapixels, amongst other things, while consuming less power. NVidia also announced the Tegra 4, which also boasts significant performance boosts while consuming less power. So going forward we can expect more powerful phones with longer battery lives.

The CPU is not the only processor. Most of the mobile chips are systems on a chip where the GPU is also part of the same unit. The most common GPUs are based on PowerVR technology licensed from Imagination Technologies or ARM’s MALI Technology. The exceptions to this are Qualcomm, which makes their own GPUs called Adreno, based on technology acquired from AMD, and NVidia, which uses its own GeForce GPUs. They announced that the Tegra 4 has 72 GPU cores.

For now these are the big players, but there are up and coming Chinese processor manufacturers like MediaTek, who promises decent performance and cheap processors. In fact a ZTE-made phone with an 8 core processor made by MediaTek is rumored to be hitting the market in the second half of this year.

But there is one company that benefits disproportionately from the mobile boom, and that is Qualcomm, because you simply cannot make a phone without Qualcomm technologies. And with the proliferation of cellular communication into more devices like tablets, cellular hot spots, etc., it is all good for Qualcomm.

Another beneficiary of all this is TSMC (NYSE: TSM). TSMC is a contract chipmaker who actually produces processors for Qualcomm, NVidia, and potentially for Apple.

Here is a chart showing 5 year performance of the stocks mentioned in this article that are traded on the US markets. 

Other than NVidia, all of them performed admirably, especially ARM. Lets look at the income growth of these stocks.

 

ARM currently trades at a hefty P/E of 80, which may not be justified as the price has seriously outpaced income growth, especially when you compare it to Apple. Only Apple’s and Qualcomm’s profits grew faster than their stock prices, so I would recommend those two stocks. Samsung trades OTC as SSNLF, but is thinly traded. It also sports a low P/E in spite of spectacular income growth.

Stay tuned for Part 2 – software and more coverage on other device and component makers.

Disclosure: Own AAPL, INTC

The Real Dividend Stocks and How to Find Them

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I’m always on the hunt for good dividend payers so I try and read articles and posts on good dividend paying stocks mostly to come away disappointed with stocks paying 2% – 4% dividends. That is not good. Doesn’t matter if the dividend is growing or has been growing forever, a current yield of 2% or 3% is not what I would consider a good dividend stock.

Dividend stock lists often contain stocks like McDonald’s (3.5%), Wal-Mart (2.3%) and Pepsi (3.1%). All of them pay growing dividends and have paid dividends for a long time. Good stable companies whose dividend is not likely to reduce. But in my mind these are not “dividend” stocks. That’s like savings accounts calling 0.25% high yield.

I want yields of more than 4%, preferably more than 6% and the expectations of growing dividends. And it turns out that this is not a difficult problem at all. I simply needed more research. And here it is.

Let me start with my favorite dividend stock – Kinder Morgan. You have two options investing in Kinder Morgan — KMP (NYSE: KMP) and KMR (NYSE: KMR). They pay a dividend of 6% and 6.3%, respectively. KMP pays dividends in cash and KMR pays dividends in stock. KMP is a partnership and you have to deal with K1s at tax time, while KMR is like a regular stock. Both of these dividends are tax free until you actually sell the stock. Kinder Morgan is an MLP (Master Limited Partnership — a publicly traded partnership that is generally used by oil and gas pipeline companies) and there are several other MLPs that also pay good dividends. The industry as a whole is a good place to look for dividend payers.

Another good dividend paying stock is Verizon (NYSE: VZ) (4.8% dividend). Personally I prefer Verizon over AT&T (5.3% dividend) because as of now Verizon has invested in actually having a better network with more coverage. Also the stock has been performing better.

Another industry that pays good dividends is the Shipping Container Leasing industry. The leaders Textainer Group (NYSE: TGH) and TAL (NYSE: TAL) both pay excellent dividends of 5.6% and 6.8%, respectively.

To find these stocks I went through a stock screener looking for stocks yielding more than a certain percent and then looked up each one to see if the dividends were stable and growing, if the company actually made enough money to cover the dividends, and I’ve avoided companies and funds with complex financial business models that I don’t clearly understand.

Other dividend paying stocks I recommend are:

  • Waste Management – WM (4.2%)
  • Glaxo - GSK (5.3%)
  • B&G Foods - BGS (4.1%)
  • Transmontaigne Partners - TLP (6.7%)
  • Intel - INTC (4.3%)

in addition to the ones already mentioned in the article

  • Kinder Morgan – KMP (6.3%)
  • Verizon- VZ (4.8%)
  • Textainer Group – TGH (5.6%)
  • TAL (6.8%)

That is a good list to start with and you can always find your own gems by using a screener.