The Best "Shadow" Plays in Silicon Valley Right Now

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From the Editor: If you've seen Michael's new briefing, you know why we can't get enough of his research. Today, he gives you yet another reason his subscribers have been able to make so much money.

This is one of the greatest secrets of investing.

It's a strategy that I developed during my 34 years in Silicon Valley. And it will let you tap into some big, big profits for a modest amount of effort.

In fact, this very cool approach to high-tech investing will uncover a bushel of double-digit winners that your friends, co-workers, and others you talk stocks with have no hopes of finding.

Today we're going to perform a bit of high-tech detective work - peering into the shadows of Silicon Valley for profit opportunities most investors don't even know exist.

And I'll even identify the four double-digit profit plays that my sleuthing has already uncovered.

Tracking Our Prey

There's an odd sort of irony about being an investor in this Age of Information. It seems that the more information about stocks and companies that becomes available, the more one-dimensional, more unimaginative, and less probing most investors seem to have become.

Over at Strategic Tech Investor, that's not how we roll.

While it's true that some of the best investments you'll find are out in plain sight, the reality is that most of your biggest winners are going to require special efforts to discover.

In other words, to find the very best investments - the little-known companies that offer the biggest gains - sometimes you're going to have to peer into the shadows... past the big, obvious companies that the masses always seem to pursue.

That's the kind of tech-investing "detective" work I'm referring to.

But you have to know where to look.

With today's exercise, we're going to start with iDevice king Apple Inc. (Nasdaq: AAPL), and work our way into those shadows.

Because its entire business depends upon the company having created an entire "eco-system" - a range of products made possible by a robust and innovative roster of suppliers.

It's that group of suppliers that offers us the biggest profit potential.

I've chosen Apple because its proven ability to manage its global supply chain remains a key ingredient of its success. By outsourcing most of its components - even major assembly operations - the company can focus on growth and maintaining high profit margins.

Apple literally has dozens of suppliers - making cameras, keyboards, semiconductors, sensors, mice, speakers, monitors, glass screens, and more.

In short, in our search for less-than-obvious profit plays, we find that Apple has created a "target-rich environment."

Here's where the "high-tech detective work" that I referred to at the outset will tell us which of those many companies will deliver the biggest payoff...

So let's start our sleuthing by reviewing the four areas that have been the key to Apple's success.

I'm talking about semiconductors, sensors, storage, and assembly.

Detective Profit Play No. 1: Semiconductors

As many rave reviews as Apple products get for their gorgeous designs, computing is still the company's core business. And that means that processing power - for laptops, handhelds, or iMac desktops - remains key.

And semiconductors are an area where it's still worthwhile for Apple to outsource.

The chip industry is highly competitive and requires constant investments to stay abreast of new breakthroughs in miniaturization and speed. New microchip factories - known as "fabs" - can cost $1 billion to $4 billion to build, on average, and some have carried price tags as high as $10 billion.

In fact, the market research firm IC Insights says that spending on research and development

by semiconductor companies grew 7% in 2012 - to a record-high $53 billion.

Consider that Intel Corp. (Nasdaq: INTC) alone spent $10 billion on R&D in 2012. Apple is a major beneficiary of all that research - Intel has supplied the semiconductors for iMacs and MacBooks for years.

So, Apple played it really smart by letting established chip firms do all the research, buy all the equipment, and build the fabrication plants. That freed Apple to focus on breakthrough products like the iPhone.

Apple clearly knows how to play the field. Besides Intel, Apple counts at least 12 more semiconductor firms as vendors.

Detective Profit Play No. 2: Sensors

With the new iPhone 5S released a few weeks ago, Apple made waves by using a new fingerprint sensor to add another layer of security for the iconic device.

This allows users to skip the home screen's password - while still protecting the data on their smartphones from prying eyes.

Of course, this is hardly the only sensor in the iPhone and iPad. In fact, a bevy of onboard sensors is what really allows these devices to be truly mobile.

Just look at gyroscopes. These tiny mechanisms allow you to turn your smart device upside down or sideways and have your display screen turn in kind.

Accelerometers measure speed, motion, tilt, and more to keep the device operating accurately.

Apple is able to pick and choose the best sensors from some great companies. It currently has relationships with at least seven of the industry's top players - firms that had combined sensor sales of more than $2.7 billion in 2012. And that's just in the sensor segment that includes motion, gyroscopes, and accelerometers.

But that list of suppliers could soon increase as Apple adds more advanced, sensor-driven features to its products - particularly in its mobile-device offerings.

Detective Profit Play No. 3: Storage Systems

If the company was flying solo, there's absolutely no way the company could have kept up with all the changes in the computer storage market. Right now, the industry is divided into two main camps - flash memory and hard disk drives (HDDs).

The move to flash memory is taking place in tablets and smartphones. Flash-memory devices are solid state and have no moving parts, which makes them perfect for the smartphones and tablets that take photos and videos and store your digital music collection.

However, Apple still uses traditional HDDs in many of its desktop and laptop models. As the name implies, these high-speed devices rely on spinning discs coated with magnetic material to read and write data.

Even though mobile devices outsell PCs by a factor of 5 to 1, the HDD market is still huge. Data storage consultant Coughlin Associates estimates total industry sales of $33 billion this year.

And when it comes to obtaining disc drives, Apple set itself up for maximum flexibility. It maintains relationships with the industry's two archrivals, Seagate Technology PLC (Nasdaq: STX) and Western Digital Corp. (Nasdaq: WDC).

Detective Profit Play No. 4: Product Assembly

Clearly, someone has to take all these components and assemble them into finished products.

That's where Foxconn Technology Group comes in. The company ranks as the world's largest contract manufacturer for electronics. Based in Taiwan, Foxconn is a division of Hon Hai Precision Industry Co. Ltd. (OTC: HNHPF).

This is by far the most controversial supplier relationship that Apple has. Foxconn generated an avalanche of negative news in 2012 when the mainstream media accused the company of poor working conditions and low employee pay.

As a technology analyst, I'm not passing judgment on Foxconn. However, I have to say that I can't, in good conscience, recommend the stock right now - another round of negative news could hurt investors.

Besides, since Apple has so many suppliers to choose from, we don't have to take that risk.

I believe investors would do better to go with a firm that, strictly speaking, isn't a direct Apple supplier, but one that has a long-running relationship with several of Apple's key semiconductor firms.

I'm talking about ARM Holdings PLC (Nasdaq: ARMH), a high-margin chip-design firm that licenses its technology to nearly every leading semiconductor company in the smartphone space.

In this year's third quarter, ARM granted nearly 50 new processor licenses. That brings its total licenses to 1,050. No wonder Forbes recently ranked ARM as fifth on its list of innovative companies.

With a market cap of $22 billion, ARMH has a 22% profit margin and 13% return on stockholders' equity. Over the last three years, it averaged a 30% growth in earnings per share.

At that rate, both profits and the price of the stock could double in less than three years.

This is the kind of high-quality stock I'm always on the lookout for.

And if you'd like to see more of these stocks - and learn exactly how to play them, step by step, I have some good news for you.

In the next few days, I'm going to be releasing a new way to tap some of the biggest tech opportunities on my radar right now. You're going to love it. As soon as I have all the details, I'll send it directly to your inbox.

Keep a lookout.

About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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