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Judge a Book Solely by its Cover
In all probability, at least one of
your parents offered
this idiom during your formative years.
What’s most interesting about the metaphor is that most of us still
don’t always listen. When you think
about it, the reason most of us buy many of the products we do
stocks) is based upon their exterior.
More accurately, we may get past the cover but seldom read the whole
Rarely do we truly dig deep beneath
the surface more than a
page or two. With products, we may read
some reviews online, ask a friend and maybe examine the product for
before purchasing. With investments, we
usually check a couple of key fundamental metrics and maybe look at a
identify trends, support, resistance, etc. and then click the “buy”
button. If you follow us here at Zacks, you may buy a
stock solely on its Zacks Rank.
is nothing wrong
with this investing approach if you are finding success; but can more
value be unlocked if we look deeper?
Derivative trades are investments that lie beneath the
surface. They are opportunities that
derive value from the success of a product and might just give you more
than the original stock itself. The
analogy would be if you found that accountants who went to Harvard were
the best and quickest refunds for their clients at tax time.
Sure you could hire one of those Harvard accounts
to do your taxes; but what if you looked deeper and found they all were
particular type of software? Maybe the better investment would be the
Because of its immense popularity,
I’ll use Apple as an
example. The iPhone as a product is sleek,
well constructed and functions as it’s supposed to (I just bought the
4S). The millions that have been sold are a
testament to its exterior quality and the genius of its manufacturer.
But what about its construction? What
of the chips, radios
and even metals used to construct those components and even the
allow it to function?
I can’t tell you that I am the first
to talk about
derivative trades; but hopefully I can offer some unique insight and
your thought process when it comes to derivative trades.
Finding the most effective derivative trades shouldn’t be
limited to one product. Find a common
thread woven through multiple products in a sector; that way you can
stronger thesis for your trade.
For the smartphone it’s not just
about Apple, Google’s
Android (Motorola), HTC, Microsoft, Nokia, Samsung, Blackberry, LG,
more are all producing phones to gain customer popularity. If
we were to disassemble all the phones,
what would we find that could be potential investments?
to the Touch
Gorilla Glass, which is produced and sold by Corning (GLW - Analyst Report),
is the popular choice for
touch screen mobile devices of all sizes and shapes.
Beneath the protective gorilla glass
(which is coated in a
conductive material so you can interact with it) is a touch screen
that senses where your fingers are swiping, it might be made by Atmel (ATML)
or Texas Instruments (TXN - Analyst Report).
One layer down is the display itself,
which is the heart and
soul of the phone. Displays are
manufactured by LG, Samsung, Densitron (which trades in London) among
others. If your phone uses OLED
Display Co. (PANL)
may be getting a
royalty. Universal Display Corp. is the
brains (and holds many patents) behind a good part of OLED technology.
I was the first to talk about PANL
back in 2009.
(QCOM - Analyst Report)
produces many of the
power management and cellular connectivity processors that go into many
smartphones. You may recognize the brand name
“Snapdragon.” What you may not have known is that the
patents for some of those processors come from a company called ARM
whose technology is in
roughly 93% of all Smartphones; you can learn more here.
Motorola Mobility (now owned by Google (GOOG - Analyst Report)
provides main processors for many Smartphones (iPhone uses their own).
Texas Instruments provides hardware support
for Wi-Fi, Bluetooth, FM radio and GPS functionality. Skyworks
cellular power hardware into many smartphones and wireless devices.
They also manufacture the full wireless
chipsets for phones.
Samsung is a popular supplier of much
of the memory needs of
smartphones, but there are other players in the game.
The bottom line is that you may be
able to find value in the
maker of a great product like the iPhone or Android, but if you look
find the companies that are exposed to all of them, you may have an
opportunity to profit. Even rare earth
investments are being made in relation to the popularity and growth
expectations for mobile devices.
best investments are often NOT the ones everyone is