Stocks | Jul 5, 2007 | 0 Comments

Component Investing

A company’s stock is rocketing upwards, because sales are expected to explode. There’s just one problem. By the time you’ve learned this wonderful news, the stock has already pierced 52-week highs. Depression sets in. You’re “late to the party” again. Or are you?

It’s not too late to capitalize. Let’s imagine that the LCD market is heating up and expected to burst wide open over the next two years. However, there are three key players and a series of other LCD makers. Furthermore, you’ve noticed that the main players have all experienced recent spikes and you feel that this “boom” is now priced into the stock to some extent. What now?

Two words: component investing. In our example, LCD sales are growing and causing certain stocks to rise. Rather than focusing on the direct reason, start looking at the companies that furnish the parts and services to the key companies.

Sony, Samsung and Sharp are big LCD players. Here’s the problem. You know that millions of units will be moved, but you don’t know how the sales will play out.

Rather than throwing a dart at a board full of stocks, you can do something better—find a common link.

The first step is to break the product or service down and find its supporting parts. As you know, an LCD has a glass screen. Where does this screen come from?

As it turns out, a company called AU Optronics makes glass screens for Sony, Samsung and Sharp—our common link. No matter who wins the LCD battle, AU Optronics could be a winning play, because they’re providing the glass screens.

Let’s take a look at another great example—the iPhone. Apple’s iPhone has taken the world by storm. Perhaps you feel that it’s a little late to capitalize on the iPhone craze by buying Apple’s stock. Let’s go component shopping.

Break apart the iPhone and you’ll see many components that are being provided from other companies.

The 2-megapixel image sensor for the iPhone camera is made by Micron Technology Inc. Would selling 15 million or more of these sensors cause the stock price to increase?

Another component in the iPhone is the Wi-Fi chip. Marvell Technology Group LTD provides that chip.

As savvy investors, sometimes we need to look past the obvious—directly investing in the hot company. By doing so, we have a chance to find hidden profits.