With valuations under pressure and the market skeptical of any growth stories in the electronic components sector, investors need to find companies that offer extreme valuations, confidence in management and operating leverage opportunities, says Steven Fox, CFA, a Managing Director at Cross Research LLC.
“In terms of how we are differentiating our stock picks, generally, we are looking for extreme valuation cases, obviously, because there are a lot of stocks in my group that have seen valuations cut, so below industry average EV to EBITDA, p/e multiples, positive cash flows, cash flow yields, etc.,” he said.
Fox likes TE Connectivity Ltd. (TEL), a connector company, because it is a well-run business with 35% of its sales focused on auto markets, which seems to have some good trends ahead of it, and TEL is the leader in auto connectors. He says the company also has outsized market share in auto connectors and tends to make good margins on its auto products.
“TEL also offers high incremental margins, in general. So on slow growth, we think they can improve their margins at a faster rate than sales,” Fox said. “Additionally, TEL just acquired a company called Deutsch, which turns them into a leading position in the military and commercial aerospace connector market, while expanding their opportunity in harsh environment connectors used in industrial applications.”