Contrarian Stock US semiconductors from a new note by Martin Roberge, M.Sc, CFA and Guillaume Arseneau of Canaccord Genuity. In a brief section of the note the analysts look at three sectors for potential value ideas; semiconductors, aerospace, and medical supply makers.
The semiconductor group ended 2012 mostly flat, underperforming the market by 12%. Equity analysts were quick to react to Intel Corporation (NASDAQ:INTC)’s lowered guidance and Apple Inc. (NASDAQ:AAPL)’s rare earnings miss last year. As a result, sales and forward EPS growth for semis were cut aggressively for 2013. Interestingly, historically, when capitulation signs arose from investors and equity analysts, this dynamic marked a good entry point for semis. With the group spotting a 2.5% dividend yield, it represents an attractive investment for “yield” investors.
Contrarian Stock: PC market getting beaten by smartphones
Admittedly, weak demand for PCs remains a concern. But the PC market is getting cannibalized by ultrabooks and smartphones which should continue to drive growth in 2013. Indeed, despite the decline in new orders for IT equipment, global semiconductor sales are no longer contracting which is consistent with the recovery in Chinese, Taiwanese and Korean global trade statistics for technology products Also, given the wireless nature of modern technology devices, the recovery in world telecom companies’ free cash flows suggests that we are past the worst point in terms of telecom capex cutbacks.
On the supply side, chip makers worked hard to mitigate the negative impact of last year’s slowing global demand through capex cuts. Less capacity additions means that growth in inventories should continue to contract and support chip prices, typically a powerful dynamic for the group. Finally, competition remains fierce downstream in the supply chain as major brands fight to gain market shares. Thus, we recommend investors stay upstream in 2013 and buy the unloved semiconductor group as a contrarian investment, and this ahead of the expected reacceleration of the global economy in H2/13. This trade was recommended on January 9, 2013.
Contrarian stock possible instruments, US semiconductors:QUALCOMM, Inc. (NASDAQ:QCOM), Intel Corporation (NASDAQ:INTC), Texas Instruments Incorporated (NASDAQ:TXN), Broadcom Corporation (NASDAQ:BRCM) and Applied Materials, Inc. (NASDAQ:AMAT) or Merrill Lynch Semiconductors HOLDRS ETF (NYSEARCA:SMH)
Contrarian Stock Canadian aerospace
The CANADIAN AEROSPACE I (OTCMKTS:CASG) group lagged the market for a fourth consecutive year in 2012, even though the sector enjoyed modest but positive relative earnings momentum over the past two years. As a result, Canadian aerospace equities are much undervalued, trading at a 20% discount to the market and providing 2.4% in dividend yield to investors. As such, we believe aerospace stocks are excellent contrarian investments especially considering our view that the global aerospace cycle could turn for the better in 2013 and 2014. Most importantly, world airline companies are growing their free cash flows again. This is allowing airline companies to increase capex, hence, buying new aircraft.
With corporate balance sheets flush with cash and business conditions improving worldwide as denoted by the improvement of global PMIs, we are confident that the positive economic underpinning for the balance of 2013 will continue to support demand for business and regional jets.
Otherwise, supply conditions are also improving, as Canadian aerospace companies are working hard to match production with demand. Case in point, growth in aerospace product inventories is declining fast such that 2013 should mark the end of price concessions to customers. Interestingly, a recovery in pricing power allowed the group to outperform the market by 50% back in 2009. While the sector has already rebounded much in relative terms since last November’s lows, we expect a re-normalization in relative valuation multiples, and the valuation discount with US and European aircraft manufacturers to shrink.
Finally, given the tight relationship between aerospace products’ selling price and relative share price performance, investors should at least cut underweight positions as pricing power and margins are set to improve markedly over the next two to three years. This trade was recommended on January 9, 2013.
Contrarian stock possible instruments Canadian aerospace: Bombardier, Inc. (TSE:BBD.B) and CAE, Inc. (NYSE:CAE) (TSE:CAE)
Contrarian stock: US medical equipment makers
From a secular point of view, medical equipment makers allow investors to play several themes such as the global aging population, increased demand from developing economies and new health care facility constructions in developed countries. On a cyclical basis, with Europe going through austerity, spending cuts have hit the medical device sector through weakening exports. But a recovery in foreign demand for US medical equipment products could unfold in 2013 with the re-acceleration of the global economy. Already, both European and Asian imports of medical equipment have improved recently.
Domestically, a tentative recovery in demand is already visible through industry new orders which appear to have bottomed out. Admittedly, inventories remain bloated but the pace of inventory additions has stalled and should abate now that new orders are bottoming out. What is more, productivity (production per employee) has improved significantly this year. In other words, the increase in production was not matched by an equivalent increase in the labour force. Overall, increased efficiency is a welcome development for pricing power. Indeed, incremental demand is likely to trigger higher prices understanding that production has grown five times faster than employment in 2012, suggesting a tight production capacity environment.
Last, the contrarian stock group trades at a huge discount to the market and this at a time when analysts have significantly lowered their revenue growth expectations for 2013, thus opening the door for positive earnings surprises and perhaps higher valuation multiples as investors realize demand prospects are much better than first thought. This trade was recommended on January 9, 2013.
Contrarian stock possible instruments US Medeq: Medtronic, Inc. (NYSE:MDT), Baxter International Inc. (NYSE:BAX), Covidien plc (NYSE:COV), Thermo Fisher Scientific Inc. (NYSE:TMO), and Stryker Corporation (NYSE:SYK) or iShares Dow Jones US Medical Dev.(ETF) (NYSEARCA:IHI)
