All too often, I receive emails asking about short-term trading strategies for extremely risky companies (see MedBox post below)... but what about blue-chip companies such as Intel?  Earlier this year I advocated buying Intel stock for a few different reasons:

1. It is one of the great technology companies that grew with the popularity of the personal computer, but has since been hurt by "The Death of the Personal Computer"-type statements from prominent investors and analysts
2. The Windows XP OS, released in 2001 has been an extremely popular platform for personal users, universities, retail banks, government institutions, and ATM operators.  This is due to its ease of use, security, and stability.  However, security support for Windows XP ended this April.  While most personal users and small/medium businesses have moved on to newer systems, about 90% of ATMs still use XP.  As ATM operators begin to upgrade to newer software (mostly Windows 7), they will also need to upgrade their hardware to the 2010s-era, not the 2000s-era hardware they currently run on with XP.  This is where Intel comes in.  According to Retail Banking Research in London, there are approximately 200,000 ATMs in the United States that still use XP.
3. Although many banks have started to make the shift towards newer Windows systems, many have elected to pay Microsoft to continue producing security updates (most contracts are for 1 year).  In other words, the opportunity to ride the wave of hardware system updates is not over.
4. Why Intel and not AMD or Microsoft?  Microsoft, while a great company, derives only 10% of its revenue from the Windows Operating system.  Most revenue comes from Microsoft Office and Windows Server.  Simply put, you need a big % change in OS revenue to make a significant dent in the overall price of Intel stock.  Furthermore, this news is most likely already built into the stock price.  Why Intel over AMD?  This comes down to company valuation and preference for ATM operators to go the Intel route.  AMD is already trading at a P/E ratio of 89.38 with a 1y forward P/E estimate of 18.65.  Intel's same numbers are 14.94 and 13.96, respectively.  As you can see, investors aren't expecting much growth from Intel.
5. It has been easy to trade since late last year.  Barring regular company events such as dividend announcements and quarterly reports, Intel has been following a nearly perfect technical pattern since its 52-week low last August (see chart below).  Traders who buy near the bottom of the regression channel and sell near the top will have made a significant profit.  The regression channel runs from the August 2013 low to March 4th, 2014 (the first time I made the study) and haven't changed it yet.

  6.    While the trend described in (5.) will certainly not go on forever, traders should find comfort            in knowing that Intel is a stable company and long-term prospects are encouraging.


So with a YTD return of over 8% versus less than 4% for the NASDAQ composite, is Intel still a great buy?  Yes.  With a low P/E ratio for the industry and reassuring growth prospects over the next 12- to 18-months, the price certainly doesn't match the potential.  Oh, and for all of you dividend buffs out there, it pays a hefty 3.30% yield.

Trader's Thoughts

Start buying around $27, but save some cash for if and when it drops below $26.50.

Introduction/Company Profile

Universal Display Corporation is engaged in the research, development and commercialization of organic, light emitting diode, or OLED, technologies and materials to display and lighting industries.  The company provides customized solutions to its clients and partners through technology transfer, collaborative technology development and on-site training.  The company had entered into more than 30 business agreements with leading manufacturers in Japan, Korea, Taiwan, China, Europe and the U.S. including with companies such as Chi Mei EL, DuPont Displays, Konica Minolta, LG Display, Samsung SMD, Seiko Epson, Sony, Tohoku Pioneer and Toyota Industries.  Universal Display was founded by Sherwin I. Seligsohn in April 1985 and is headquartered in Ewing, New Jersey.  Source: yCharts.com

Technology

The company’s core technology projects can be broken down into 4 categories: PHOLEDs, TOLEDs, FOLEDs, and WOLEDs (don’t worry… descriptions to come).  Perhaps the company’s most important product for near-term consumer electronics devices is their PHOLED, or Phosphorescent OLED technology.  A central theme in mobile electronics over the past few years has been minimizing the overall profile of the devices.  A fundamental roadblock to this theme has been the conflict between the growth in size of cell phone displays and the limited capacities of lithium-ion batteries.  PHOLED focuses on the former-half of this conundrum – reducing power consumption.  Universal Display’s PHOLED technology consumes about 150mW of power, versus about 325mW for a traditional LCD screen and about 375mW for an OLED screen (based on a 4” diagonal display).  Not only does this help with power efficiency (possibly allowing for a smaller battery), the reduced profile of the actual PHOLED screen will help electronics manufacturers continue the trend of thinner profiles.

Universal Display’s TOLED (transparent OLED) technology, which is still in early stages of design, provides the user with a screen that is nearly as clear as the glass or plastic substrate when powered off.  While this technology is certainly further off from mass-commercialization, it is reassuring to know that the company has more ammunition than its basic OLED technology.  A more appropriate solution to near-future consumer technologies (did someone say iWatch?) is the FOLED technology (the ‘F’ stands for “flexible”).  This is exactly what it sounds like – OLED technology on a flexible substrate.  As Google, Apple, and Samsung continue to tout their new “wearables”, there appears to be an apt suitor for their curved display challenge.

Finally, Universal Display’s WOLED technology (white OLED) is a product of the company’s PHOLED technology.  It provides an alternative to the standard incandescent and fluorescent bulbs, providing more than twice the power efficiency of an average fluorescent bulb.  The US Department of Energy initiated a program in 2000 to fund the research and development of inorganic LEDs and OLEDs as prospective next-generation lighting sources.  Since then, the company has gone from 20 lumens per watt to 102 lm/W (compared to 12 lm/W for incandescent and 40-70 lm/W for fluorescent).  Their goal is to reach 150 lumens per watt before fully licensing the technology.

Business Strategy

While initially skeptical of Universal Display’s use of the “design and license” business model, I’ve come to believe that it will work well for the foreseeable future.  There are two main reasons for this: First, the company has a whopping 125 employees worldwide.  This means that their strategic advantage lands squarely in the “designing only” realm, especially because many large electronics assemblers already retain the necessary infrastructure to efficiently mass produce the technology created by Universal Display.  The company gets its intellectual property from three sources: in-house, sponsored University research, and Motorola, Inc.  Universal Display’s more recent patents have come from in-house and company-sponsored University research, with the most recent patent from Motorola completed in early 2002.

Valuation/Company Fundamentals

From a revenue standpoint, the company is trading at valuations well below its 3-year average P/S ratio of 31.61 at its current level of 7.1.  While still an extremely rich valuation, its current price may present an attractive entry point, especially considering the company’s 1Q2014 performance and explosive revenue growth.  Although the company has provided positive accounting profits over the past 4 quarters, it has struggled to remained FCF positive in 4 of the past 8 quarters.  This has caused Universal Display to burn through over $100 million over the past 2 years, $35 million of which occurred in 1Q2014.  While most companies have discrepancies between accounting profits and FCF due to depreciation and prepaid expenses, Universal Display’s discrepancy comes from ballooning account receivable – up to $24.51 million from $10.53 million the same quarter last year.  Look for this number to stabilize in future quarters, or at least remain in-line with revenue growth.

Final Thoughts

Due to the company’s high reliance on intellectual property, it is generally unwise to use balance sheet accounting ratios for valuation because the market value for these patents is generally much higher than the intangibles listed.  Nevertheless, the company’s current ratio of 17.11 and Altman non-manufacturers z-score of 18.15 (TTM) show liquidity and solvency are not of concern.  Due to the stock’s higher volatility, it is hard to weigh any technical movements.  However, knowing the stock is near a 52-week low after a solid quarter with triple-digit YoY revenue growth, Universal Display’s sub-15 P/E ratio and current price of $25.82 present an attractive entry point to what could be one of this year’s biggest winners.  I wonder if any large technology firms looking for an acquisition are thinking the same thing…

Behold our two favorite ETFs...

Direxion All Cap Insider Sentiment Shares ETF (Ticker: KNOW)

Profile: This fund holds a portfolio of 100 stocks that reflect positive sentiment among “insiders” closest to a company’s financials and business prospects such as top management, directors, large institutional holders, and the Wall Street analysts who closely follow the company

Put simply: If people close to the company are buying shares in the company, this fund buys them too

Why this fund? One of the most prevalent concerns in today’s markets are that stocks are too expensive and all of the “smart money” (a.k.a. hedge funds and insiders) are selling their shares to get out before the markets decline.  This helps to manage that risk by only buying securities that insiders are [legally] buying, all while diversifying across 100 stocks.  It’s also important to note that companies are only eligible to appear in this fund’s portfolio if they are members of the S&P 1500 Index (so you don’t have to worry about insiders of micro-cap companies buying up their stock to appear in this ETF)

Market Vectors Wide Moat ETF (Ticker: MOAT)

Profile: This fund invests in companies that are considered to have wide economic moats.  The term “economic moat” was coined by Warren Buffett and states that the wider the company’s economic moat, the larger and more sustainable the competitive advantage.  By having a well-known brand name, pricing power, and a large portion of market demand, a company with a wide moat possesses characteristics that act as barriers against other companies wanting to enter into the industry

Put simply: Wide moat companies are able to sustain higher profits for longer and historically outperform their peers in bear markets

Why this fund? In today’s markets, you want to invest in rock-solid companies that are least susceptible to major profit/revenue loss in recessionary periods.  Wide moat companies fit the bill because they are more or less essential components of their markets, sectors, and/or industries