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 Trading
Alert: Flextronics - Best of a growing lot. |
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 Of
the five companies that dominate the electronic manufacturing (EMS) sector,
our pick is Singapore based Flextronics (NASDAQ:
FLEX). While we may be a bit early, the conditions appear to be
lining up for the return to favor of these unique companies.
The other four EMS sector horsemen
are Jabil (NYSE: JBL),
Celestica (NYSE: CLS)
Solectron (NYSE: SLR)
and Sanmina (NASDAQ: SANM)
Accumulation here and on dips
is suggested for continued growth and sector improvement for this behemoth—Flextronics--
throughout 2005.
For the record, electronic manufacturing
service (EMS) firms provide electronics manufacturing services to original
equipment manufacturers that span a range of products and industry segments,
including cellular phones, printers and imaging, telecom/datacom infrastructure,
medical, automotive, industrial systems and consumer electronics,
 At
$13.50, Flextronics has recently shown a decisive bounce from its 52 week
low of $10.06. From September 2003 until August last, the shares were stuck
in a trading range of $15-$20. In late August, selling picked up and the
shares sold off to the $10 level. This bounce appears to have some legs
and we feel that a return to the upper end of that previous trading range
is very possible. The trick shot will be from exactly what level. While
we don’t see a return to the 52 week low of $10.06, a stop loss around
that level would be prudent.
Good prospects. Why a stop loss?
We are in a goofy time in the market,
courtesy of oil, Presidential elections and divergent economic currents.
Over the next month or two, there could be quite volatile swings in equity
prices. Our rationale for bring FLEX now is that those swings could go
either way. Beginning to pick away at quality situations such as Flextronics
makes sense—primarily in case the month goes smoothly, the election goes
smoothly, and oil settles down. If not, using dips to acquire the shares
should pay off handsomely over the next 6-12 months.
Analyst earnings projections for
fiscal 2005 (as at March) and 2006 for Flex are 70 cents and 98 cents respectively.
This evidences projected price earnings ratios of 18 times and 13 times
for those years. The median price target is $21. And there appears little
doubt that the Semiconductor sector is improving. High inventory levels,
once the bane of this sector, have returned to normal levels, relieving
that pressure as demand and business improves.
About half of FLEX’s sales are in
the consumer gadget sector—handsets, printers, etc. So it, likely more
than the others in the sector, is a proxy for growth in this area, which,
while it ebbs and flows, remains reasonably stable. Flextronics has even
referred to the handset market as ‘robust’, a term we haven’t heard in
tech-land for quite a while.
The good folks at S&P have Flextronics
as their top pick in the sector. Deutsche Bank feels the shares are relatively
attractive against FLEX’s peers and has a target of $17. We think that
once the clouds part by year-end, the shares could well exceed that level
in 2005.
 SOXX
it to me?
While analysts think there could
be a soft patch for semiconductors next year following this Q4 sector rally,
we believe that that eventuality may already be priced into shares such
as Flextronics. The recent $10 low in the shares was last seen in mid-2003—when
prospects were much worse—and subsequently doubled to $20 by early 2004.
In the same period, the Philadelphia
Semiconductor index (PHLX:
^SOXX) moved from 400 to 560—softening along with the overall market
down to 350 recently. The SOX is currently 396. While the semiconductor
sector could go lower, the time to buy these (or any) stocks is when the
sector constituents either look ugly, or at least—as now—in a state of
flux.
Hence our call to dip a toe in to
be there, but with an eye to using price dips, if they appear, to fill
in positions.
Got comments, questions or suggestions?
Send 'em on over:
Editor@smallcapdigest.net
If you wish to send a written request
or inquiry, please send it to our physical address:
TGR Group, LLC
3525 Del Mar Heights Rd #334
San Diego, CA 92130
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