CES Investor's Guide: All in the Chips

LAS VEGAS -- The Consumer Electronics Show (CES) kicks off here today, bringing together a huge number of technology companies focused on gaining the consumer's attention in a market scaling into billions of devices.

For investors scouting out the scene, the options can be mind-boggling, ranging from the eccentric to the mundane. Waterproof tablet, anyone? Tech backpack? But let's try to boil it down for you -- the best way to make money in consumer electronics (other than buying Apple) is probably on the components, rather than the finished products.

For suppliers catching the right trends, such as smartphones, it's still a fast-growing market with plenty of opportunity. Smartphone subscriber growth, as defined by 3G mobile systems, is growing at a 35% annual rate, according to Mary Meeker, a partner at Kleiner Perkins Caufield & Byers.

The CES is bringing together every major consumer electronics player on the planet, from phone manufacturers to microphone salesmen. But here's an idea for the investor: glass. It's one of the materials that goes into these devices, whether it comes in the form of silicon (chips), LCD units for displays, or the screens themselves.

Think you want to play the consumer electronics boom? The best way is likely the chips and glass that go into your mobile toys. Here are some companies that give you exposure to consumer electronics and happen to have cheap stock prices relative to earnings:

• Corning (NYSE: GLW) seems to find its way into every tech bubble, whether it's providing optical fiber or LCD displays. Its proprietary glass products are market leaders in LCD TVs and mobile devices, but the stock got crushed recently on news that Chinese manufacturers were putting pressure on its margins. Shocking!

  At the CES, Corning is introducing a next-generation product -- Gorilla Glass 2 -- for the consumer electronics market. The company claims a 20% reduction in thickness. There is no doubt this is a huge market for Corning, since it has its glass in more than 500 products and 500 million units worldwide.

  How strong is it?

  

  Corning rep demonstrates Gorilla Glass 2 at CES. (Photo by Curt Harsch)

  For investors, however, the most attractive thing about Corning may be its recent correction. The stock is trading at $13.61, almost 50% off its 52-week high, and sports a forward 2012 P/E ratio of only 7. This company earned $3.4 billion in the last 12 months and has a return on equity of 17%. If you are worried about an implosion, think about the tech doldrums of 2009. While some companies were going down the tubes, Corning "only" earned $2 billion of profit that year. That may give you a sense of the floor for the stock. It's hard to see it trading below $10, and it feels like a bargain here.

• Qualcomm (Nasdaq: QCOM) is the Goliath in the mobile chip sector. But more importantly, its unique wireless technology patent portfolio allows it to collect licensing fees on millions of devices. Qualcomm is also making an aggressive push into tablet computing, which also needs wireless chips. Meanwhile, Intel Corp. (Nasdaq: INTC) is struggling to make headway in the mobile market.

  I don't think Intel's going to gain on Qualcomm in this sector. Qualcomm's too good, and I think it's got some big design wins coming in Asia. For the long term, Qualcomm's one of the safest tech plays on earth. It trades at a forward multiple of 14 on 2012 earnings. With a return on equity of 18% and annual earnings growth of about 23%, it's not an expensive stock.

• SanDisk Corp. (Nasdaq: SNDK) Think memory. SanDisk, the memory chip maker, remains one of my favorite tech component plays. The biggest problem for SanDisk, whose biggest product is flash memory, is that it has little control over the supply of memory to Apple Inc. (Nasdaq: AAPL), which has been aggressive in controlling memory manufacturing, so that it can charge a premium. Apple also has a track record of trying to cut suppliers out of the loop (more on that later). But that's OK, because even if SanDisk can't have all of the Apple market, there are hundreds of millions of other devices out there.

  Another issue for SanDisk is the fear that the flash memory business is being commoditized, which would continue to pressure margins as prices fall. But I think this fear is overdone, because the market is still growing very fast, and there are many years to go. If you haven't noticed, I like companies with huge profits, great balance sheets, and low P/E multiples, and SanDisk has all of those. It made $1.2 billion in the last 12 months. It has $2.6 billion in cash on the balance sheet, a return on equity (ROE) of 20%, and a forward P/E of 10. Remember our IU investment rule about picking stocks with a lower P/E than either their growth rate or ROE? Sandisk meets these criteria.

• OmniVision Technologies Inc. (Nasdaq: OVTI) has been clubbed recently. The company makes specialty chips for mobile devices, including camera and imaging chips. Recent pre-announced downward earnings revisions have caused the stock to plunge more than 60% off its highs. In addition, OmniVision has been plagued by rumors that Apple is pushing it out as a supplier of screen illumination chips. Though OmniVision still has a healthy business in camera chips with Apple, the computer maker recently starting double-sourcing its illumination chips to Sony.

  But let's calm down. OmniVision had a bad 2011, but it now trades at a P/E of 5. Its products shipped to more than 150 million devices in the second quarter of last year. Most market research firms expect the mobile smartphone market to climb to 1 billion units in the next few years. OmniVision sells plenty of parts into an enormously growing market.

  This stock is so cheap that it discounts many bad things that are happening. We'll look for it in the mix at the CES. Despite its recent stumbles, OmniVision has a one-month ROE of 20%. It's got $465 million in cash, only $50 million in debt, and a $740 million valuation. In other words, more than half its market valuation is cash. Really.

If the CES just bores you, maybe you should join Apple, which sits the show out -- or buy it. Apple shuns big industry trade shows, because it's more interested in running its own show. That's also how it treats its suppliers. But it's still the bellwether of the mobile device space. We've told you several times that it was cheap, and it finally looks ready to hit new highs. Apple's stock has been trading recently at $423. (Its 52-week high is $426.) The company has a P/E of about 15. It's not as cheap as it was six months ago, when I told you it was cheap, but it's still a must-own stock if you want to play the consumer electronics space.

Those are the bargains I see in electronics. I'll be on the CES floor in the next few days checking out trends and product launches, and I'll be reporting back daily.