Buy Qualcomm (QCOM). In the current stock market and economy you want to own stocks in the sectors of the market that are outperforming rather than lagging and you want to own companies that can grow even when the economy isn’t. I think cell phone chip-maker Qualcomm fits the bill on both accounts.
First, technology has been one of the strongest sectors this year. Witness the 16% return for the technology-heavy NASDAQ Composite Index in the first six months of 2009 versus the 1.8% gain for the Standard & Poor’s 500 stock index. Qualcomm shares have done even better, climbing 27% from the beginning of the year through June 30. In a market like this you want to buy relative strength. (The shares have dipped about 10% in the current correction creating a decent buying opportunity.)
Second, Qualcomm has recently raised estimates for the fiscal year that ends in September 2009 and looks likely to outgrow both the U.S. and the global economy over the next 12 to 18 months. With next generation 3G wireless phone systems rolling out around the world, Qualcomm’s handset volume is projected to climb by 10% in the June quarter from that same quarter in 2008. A lot of that growth is coming from the world’s emerging economies—in Brazil, for example, the shift to 3G smart phones is just gaining momentum. Networks built on 3G technology use some flavor of the CDMA standard where Qualcomm’s patent position is strongest. The current market leading GSM standard now controls about 60% of the market so Qualcomm will see its global market share grow as the rollout of 3G technology moves market share toward CDMA.
That should make up for any slowdown in the U.S. market. Thanks to its patents Qualcomm collects a royalty on phones sold by Motorola, LG, Samsung, and other companies. Royalties and license feels make up about 40% of company revenues and come with an operating profit margin of near 90%. The other 60% of the company’s revenue comes from its chip-making business. Most of those chips go into the wireless phone sector but Qualcomm is also moving into a new business. Its chips, built on the low-energy platform from ARM Holdings (ARMH), are on the march from cell phones to smart phones to net book computers, where they look like a winner against Intel’s (INTC) current generation of low-power Atom chips. That’s a whole new growth business for Qualcomm. The company is set to report earnings on July 22. As of July 15, I’m adding these shares to Jubak’s Picks with a target price of $55 by March 2010. (Full disclosure: I own shares of Qualcomm in my personal portfolio. I will be adding more three days after this note is posted. As is the rule for Jubak’s Picks, I won’t sell my personal position until three days after I’ve posted a sell on this blog.)
Both Intel and Qualcomm are on your buy list. However, both these companies are going to become more of competitors in smartphone and upcoming smartbooks. Business Week has an article: http://www.businessweek.com/magazine/content/10_04/b4164021472813.htm
Should one bet more on Qualcomm or better to hedge by buying both Qualcomm and Intel?
Naming your son Finn was enough for me to start reading your blog. I have a 21 year old named Fionnan – hoping to regroup my investments over the coming years from the declines of the last few. After Reading ‘The Ascent of Money’, I’m left wondering how to go forward. I’m hoping your blog’s straightforward style will help.
Good luck with your new undertaking.
Just bought QCOM based on your reco. Can’t tell you how clueless I was without your insights into the market!
Welcome back Jim! we missed you…
Jim Is the coolest guy i know!
thanks – that explains the methodology well.
I think you can get where you want to go from the target price that I set (which does include technicals as well as otgher factors). If you agree with my target price, you should buy if the current price is low enough to give you what you regard as a reasonable return on your money over the period in question.
I assume you think the price is right (at a given point when you issue your Buy recos. Why dont you suggest a buying price range, based on technicals of the recent past?
Thanks for your help.