The One Stock to Buy for All Big Tech Developments
November 12, 2020
Technology is the alchemy of the markets. Taking basic materials and turning them into vital products and the latest apps has caused stocks in the tech sector to soar.
Tech is the outlier in performance, even with some hiccups now and again.
S&P Information Technology Index Total Return—Source: Bloomberg Finance, L.P.
For the trailing five years alone, the S&P Information Technology Index has returned 214.2%, which is more than double the return of the S&P 500.
My Way to Play Tech
If you take any of the big tech themes and open up the companies and their products like I do, you can find lots of value and opportunity for growth and income.
And from fifth generation (5G) wireless to electric cars to the latest smartphones, wearables and pretty much every other new tech product, they all need electric power and batteries.
Some months ago, I came up with a historically well-known company that’s supplying the mission critical components for all of these tech opportunities. It’s called TDK Corporation (TTDKY).
Let’s start with 5G.
Not a day goes by when I don’t see or read discussions about 5G. TDK provides the power, with its electricity management and supply products.
Each antenna has to have power management that takes wired alternating current (AC) and makes it work with DC-powered electronics. The capacitors and inductors that TDK has developed are at the forefront. And its products are the best.
Meanwhile, take that device that’s either in your pocket or on your desk. Smartphones need batteries that quickly charge, evenly power and don’t overheat and explode. TDK is one of the leading battery makers for these devices. And it also provides the voltage temperature management and sensor devices so that your pants don’t catch fire.
Phone sales, including for iPhones (AAPL) with 5G, are creating a surge in demand for TDK products.
Beyond 5G, electric cars and autonomous cars are other technologies that get daily attention, including Tesla (TSLA), Nikola (NKLA) and Rivian Automotive (private).
But every automaker has electric cars now or in development. And what they all have in common are TDK products.
Capacitors and inductors receive, store and transmit power that makes all of these products move and stop. And those voltage monitors that keep phones from exploding are even more critical for cars.
What also makes cars move from electricity are magnets. TDK has developed the go-to magnets. And storing that power takes lots of batteries. Again, TDK is a big leader here.
Solid state batteries are what’s going to really help electric cars and trucks power up more quickly, hold power more efficiently and not create massive environmental devastation.
Yep, TDK is a leader in developing and deploying them.
Now on to autonomous cars. Right now, one of my cars can pilot itself in traffic on a limited basis as well as starting and stopping when it has to do so.
There are all sorts of sensors on cars that are part of the autonomous developments. TDK sells a lot of them and continues to sell more of them, including its acceleration sensors and gyro sensors that keep cars aware of where they’re moving.
TDK Revenue—Source: Bloomberg Finance, L.P.
Revenue from its myriad technological goods continues to rise, with the past 10 years showing a consistent climb.
Its compounded annual growth rate (CAGR) is running at 6.5%. Margins vary across its highly diverse collection of products at 7.2%. And in turn, that works to deliver a return on equity that compares well with tech peers at 6.4%.
TDK Total Return—Source: Bloomberg Finance, L.P.
The company has plenty of cash with current liabilities covered by 130%. And debts are minimal at only 23.7% of assets. This provides the ability to borrow if needed to invest in developments.
But given the revenues and the retention rate of 60.6% of earnings, it has been highly successful at self-funding its pipeline of innovations.
And it also pays its shareholders with a yield of 1.3%.
The real attraction beyond all of the components and systems is that the stock is valued at close to just the amount of revenue produced over the trailing year, with the price to sales at 1.3 times.
And its intrinsic (book) value of highly-difficult-to-replicate factories and patents is priced at only 1.96 times book. This is a bargain stock for what’s under the hood.
The shares have returned 145.1% over the past 10 years for an average annual equivalent of 9.4%. But not without some ups and downs. I see that there are a lot more ups coming as folks learn more about the company as I have.
TTDKY is a great buy as a behind the scenes tech value with income, ideally for a taxable account.
All My Best,
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life