When government boosts its involvement in the economy, there's a predictable impact on interest rates, taxes, inflation, the country's currency and even its stock market. As a veteran global investor, I've seen this play out time and again in emerging-market economies, where it's commonplace for government to play an active and heavy-handed role.
I also know how to turn this special knowledge into beat-the-market profits.
Here in the United States, the Obama administration and the U.S. Federal Reserve are like two elephants that have been put to work brutishly reshaping the U.S. economy. We're already experiencing the effects of big government involving itself in the private sector. Expect the dollar to fall even more – after year-end profit-taking ends. Also expect a further deployment of government-stimulus money to industries where the United States has a large competitive advantage and can generate domestic jobs.
We'll be only too happy to ride the resulting economic shifts for profit.
In fact, as part of this installment of "Buy, Sell or Hold" – I've identified three of the best profit opportunities for the New Year. The three "must-own" companies – each poised to benefit from these shifts – are: Corning Inc. (NYSE: GLW), The Boeing Co. (NYSE: BA) and Cypress Semiconductor Corp. (NYSE: CY). We offer them to you here as part of a Money Morning "Outlook 2010" Special Report.
All three of these companies share five strengths. They each:
- Are sector leaders.
- Enjoy sustainable competitive advantages on a global basis.
- Have strong balance sheets.
- And are major exporters, meaning they will benefit from the weaker U.S. dollar that's almost sure to come.
Let's look at each of the three companies individually.
Corning: Cooking With Glass
U.S. President Barack Obama just announced his intention to deploy nearly $200 billion in surplus bank-bailout money for use in a new-jobs program. This follow-on to the $787 billion bailout plan passed last winter contains more money for infrastructure. Since we continue with our very successful follow-the-government money investing theme, here is where Corning comes in. Here in this Age of Computers and Telecommunictions, infrastructure isn't limited to blacktop highways, it includes fiber-optic superhighways.
There is an allocation for expansion of broadband networks, especially to rural areas. And in the words of President Obama the rate of investment in the coming six months will be double that of the past six months — Corning is sure to benefit from this.
But this is not just a U.S. phenomenon. It is global: Countries all around the world are rushing to bring broadband access into homes, from Australia — that passed a broadband plan several times larger than that of the United States — to Argentina, telecommunications companies and countries realize that either they enter the new, faster technology or their days are numbered.
And even before all this stimulus hits the market, Corning just boosted fourth quarter glass volumes estimates. You see, Corning, which invented the procedures for manufacturing glass fiber, has the best optical fiber out there. Corning's fiber has superior bandwidth uniformity, better protective coating and better performance. The added performance is especially better around bends. Because of this, you need less signal amplifying than with other types of optical fiber and this adds up quickly.
When you are deploying miles and miles of fiber, any savings becomes significant.
But not everything is about government stimulus programs. Corning's superior fiber is also being deployed in the race by telecommunications and cable companies to bring fiber-optic connections all the way in the homes of consumers and businesses. This enables them to offer so-called "triple-play" service – telephone, Internet and cable.
In addition to the active fiber-optic-cable business, Corning controls 60% of the glass flat panel market, where its products are also market leaders in terms of quality.
And demand for flat panels used in TVs and in PCs is increasing more than expected. There are many very important trends on the upswing in devices that utilize glass screens:
- In the PC space we have the Windows 7 launch, obsolescence of old machines, prompting another upgrade cycle at both the corporate and consumer levels.
- The new Apple products including Apple's new operating system are very successful, and helped by the success of the IPhone and ITouch, are driving Mac sales. Then we have the reader device race, due to the success of the Amazon Kindle, which we predicted here and the attempt by many competitors to enter the space.
- In the portable computer segment we are seeing the take-off of the cloud-computing revolution, which is promoting a very large number of sales of notebook PCs and kicked-started another upgrade cycle in the PC and electronic gadget industry.
- We are also seeing the success of the iPhone, Blackberry and others with new models, that has prompted an upgrade cycle in mobile phones.
All of these volume effects, coupled with a channel that is not overstocked with product, and less price competition will drive margins higher for Corning. The stock is trading at a low Price/Earnings to Growth Rate (PEG) ratio, which shows that analysts have underestimated the resiliency of flat panel TV sales this Christmas season, the recovery of the U.S. economy and, not to be forgotten, the weakness of the U.S. dollar. Nobody wants to lose their jobs with rosy outlooks that then fail to materialize. And obviously nobody expected President Obama to launch this new, additional stimulus in broadband.
At Friday's closing price of $18.47, Corning's shares are essentially trading at their 52-week high. They're headed higher.
Recommendation: Buy Corning Inc. (NYSE: GLW) at the market. (**)
Boeing Zooms Past Turbulent Times
The Boeing Co. (NYSE: BA) is benefiting from the revival of the global economy, rebounding airline travel and the return of airplane financing. The big prize: Its 787 Dreamliner has literally taken flight.
Boeing is the largest U.S. exporter and is a key government contractor. Its vast storehouse of know-how and technologies include many that are hidden by "black-budget" projects, meaning the typical investor doesn't even understand Boeing's full long-term earnings potential.
The bottom line: Boeing is a core component of the U.S. economy.
Investor sentiment has soured in recent years because Boeing has been flying through an awful lot of turmoil for quite some time. The company embarked on an admirable quest to change the nature of the aviation market, by launching a breakthrough product: The Boeing 787 Dreamliner.
This plane, built of light-but-strong composite materials, can achieve huge fuel efficiency and thus allows the commercial jet to fly faster, higher and for longer distances – all of it more cheaply.
When it does fly, the Dreamliner will change the face of the aviation industry. And its superior technology will assure that the airlines that put the 787 into their fleets will be able to underprice their rivals and make more money on the long-haul routes that the Dreamliner will fly.
Rivals will have to ante up and buy Dreamliners, too – or risk getting left behind. This all sounded great for Boeing. But then the Dreamliner program – and the company – flew through severe organizational turbulence.
First, there were many delays in this new airplane, which is now a good 18 months behind schedule. So Boeing is paying penalties on the delayed delivery of the planes that were already sold. And these costly delays come on top of having endured a strike by the machinists union. To cap all the bad news, the global economic crash of last year sent both business and leisure travel into a nosedive.
At Friday's closing price of $55.60, Boeing's stock is selling for about half of what it traded at during its 2007 peak, when the company's future was bright just before its problems began.
And with the way the U.S. dollar has lost altitude, the reality is that Boeing's shares are even cheaper than that in constant currency terms. The reason is simple: Boeing is a turnaround story. And great fortunes have been built on turnaround stories.
Will 2010 be the year of a turnaround for Boeing?
What we do know is that Boeing is a company with a huge possible resiliency. It has a huge backlog. Indeed, even with the drop in travel, Boeing's huge order backlog means that the company will keep its production lines busy for years to come. In fact, sales are already up 5% through September, compared to last year.
Long term, the situation looks very promising: This airplane market could scale up to $2 trillion over the next couple of decades, by some realistic estimates.
The 787 had successful taxi tests Saturday, and will undergo its maiden flight tomorrow (Tuesday). That will start a yearlong process of certification. And Boeing is going to use the 787 ultra-light technology to develop narrow body airplanes as well.
Lately, Boeing and Airbus SAS, its arch-competitor, have been running neck and neck in terms of sales in this sector segment. Most major carriers have been splitting their orders right down the middle, in order to play one manufacturer against another and obtain greater discounts. This is precisely what UAL Corp. (Nasdaq: UAUA) did with its 50 wide-body plane order recently, in order to take advantage of the market.
But this strategy is not going to last. Once the backlog is established, the negotiating position of the buyers deteriorates and end prices strengthen. If anything, UAL's order signals to others that they are missing the boat, as UAL pre-empted them.
Once this process gets going, we are going to see a lot more orders come in, and each new order will help send Boeing's share price higher. To help in the process, the Export-Import Bank, one of the few money-making enterprises of the U.S. government, has guaranteed financing for more than $8 billion of sales. And Boeing itself, through Boeing Capital, has helped with about $1 billion in financing this year, a real ace-in-the-hole in today's sometimes tough credit markets. In addition, Boeing Capital has been teaching banks around the world, especially in China, how to jump-start their own airplane-financing lending.
Airplane leasing is a well-established collateralized lending practice, which carries relatively low risks. You see, the airplanes have a very transparent and liquid international market value, they are fully insured and they are very easy to repossess almost anywhere in the world, should the buyer default on the loan. By some calculations, China alone will represent some $400 billion in orders over the next 20 years, as the Red Dragon triples its fleet by ordering some 3,770 airplanes.
With a market more focused on Boeing's risks, the economy recovering, credit conditions easing dramatically, the banks repaying government aide, a weak U.S. dollar, and all the company-specific upside catalysts we mentioned, Boeing is a ready-made profit opportunity. The stock's low P/E during a period of low profitability represents a strong buying opportunity – especially at a point when Boeing's profits are poised to take flight.
Recommendation: Buy The Boeing Co. (NYSE: BA) at market. (**)
Saving the Best for Last
When it comes to Cypress Semiconductor Corp. (NYSE: CY), let's cut right to the chase: This stock is a steal – grab it while it lasts. With Cypress, you are catching the beginning of a strong tech cycle, and will be making it work for your portfolio.
The stock closed Friday at $10.40. At the end of 2007, investors were trampling over each other in order to buy this stock at almost exactly four times its current value. The semiconductor sector is a very cyclical one. As the technology cycle plays out, they are usually the first ones into recession; they are also the first ones to recover – with a vengeance.
So catching the stock as the cycle begins is very important in order to achieve inordinate profits. This is the case with Cypress Semiconductor today. Let me tell you why.
Cypress Semiconductor is the poster child of this cyclicality. After having seen a collapse in sales when the global economy froze due to the banking-system implosion, the new accelerating trend in quarterly sales is almost picture-perfect.
As is the case for most high-tech manufacturers, as economies of scale kick in and capacity utilization increases, profit margins expand. Again, Cypress Semiconductor fits this profile to perfection. Its margins are increasing sequentially quarter after quarter, and will keep expanding strongly well beyond 2010. In the last quarter alone, the company's margins increased by a full 10 percentage points.
With margins at about 42% right now, it is very easy to see the company's margins reach 50% and above by the end of 2010. Amongst the arguments in favor of this stock is the strong negotiating position Cypress has with many of its suppliers, which in today's highly competitive environment will allow the firm to extract bigger discounts from its vendors – something that should enhance its already-impressive margins.
Cypress chips are used in the consumer, computation, data communications, automotive and industrial markets. In the New Year, expect to see a pickup in new-product sales, including in the innovative system-on-a-chip product, which will boost top-line growth. Expect growth in sales of chips that control touch-screen functions, a very popular choice for consumers in new phones since the Apple Inc. (Nasdaq: AAPL) iPhone revolution. Sales of chips for this purpose in Samsung's new Omnia 2 will kick in 2010.
All of this positive profit momentum derived from new product lines will soon result in a turnaround in the bottom line, especially those linked to smartphones. That cherished objective – to push profits to where they actually deserve to be – will make the stock seem like a steal if purchased at current prices.
The strong smartphone, PC, laptop and netbook upgrade cycle that we described in our Corning write-up is also helping Cypress. And, after having spun-off solar-cell manufacturer SunPower Corp. (Nasdaq: SPWRA) in September 2008, Cypress Semiconductor continues to successfully introduce new, higher-margin products.
The stock has a low P/E, despite being a fast grower in the beginning of a tech cycle. From a technical perspective, it is in a powerful bull trend pattern: the cup-and-handle pattern that usually presages a strong breakout to the upside. In this sense, it has broken through the 50-day and 200-day exponential moving averages already.
The catalyst for the breakout could very well be the coming earnings season. Cypress Semi will report Jan. 21, and the weak U.S. dollar alone will help the company beat estimates, even though growth in this quarter is seasonally slower for Cypress.
(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Corning, Boeing, or Cypress Semiconductor.
[Editor's Note: Success as an investor isn't based on what's hot today.
It's really based on the anticipation of what will be hot tomorrow.
Gold is one of the hot commodities of today. But the shrewdest investors will look toward the horizon, and try to project just what the commodity profit plays of the future will be.
If you need help, just ask Money Morning's Horacio Marquez.
As worries about oil escalate - whether those worries are about future supplies, future prices or global-warming - more and more muscle is being placed behind alternative power technologies. That's especially true in the hybrid vehicle market, where a specific technology has emerged as the clear leader.
The technology is lithium-based rechargeable batteries, and its emergence is sending lithium demand skyrocketing.
The profit potential of this market is stunning - but only for investors who can figure out the right way to play it.
Here's the thing: Marquez - a Money Morning contributing editor who also edits the Money Map VIP Trader - has uncovered the lithium-tech leader. This company is a global player with a solid market cap and is well known within the hybrid industry. But surprisingly few investors know about the company, or have ever even heard its name.
To learn more about this company - to get in ahead of the masses - and to find out more about Marquez's Money Map VIP Trader, please click here.]
News and Related Story Links:
- Money Morning "Outlook 2010" Economic Forecast Series:
Outlook Series Index (Access Stories Free of Charge)
- Money Morning "Outlook 2010" Economic Forecast Series:
U.S. Economy Will Dodge a Double-Dip Downturn, But Won't Escape Unemployment Woes During 2010 Jobless Recovery
- Money Morning News Analysis:
Obama Offers New Stimulus Package to Create More Jobs
- Money Morning "Buy, Sell or Hold Archive:
Past Story File (Free of Charge)
- The Seattle Post-Intelligencer:
Boeing Set to Fly 787 Dec. 15.
- Apple iPhone:
Official Web Site.
- Samsung Omnia:
Official Web Site.