Don’t Miss Your Chance For 82% Gains!
Investors breathed a huge sigh of relief yesterday. The second quarter of 2010 finally came to an end. Many are hopeful the end of the quarter also brings with it an end to the market correction.
Unless you’ve been living under a rock, you’re well aware of the recent market decline. Since hitting a high of 1219.80 in late April, the S&P 500 Index (SPX) has dropped more than 14%.
It’s the first 10%-plus correction of the bull market off the March 2009 lows. And it’s now given us our first quarterly loss since the bull market began.
You don’t have to look very far to see why the market’s down.
The daily news is providing a steady stream of bearish events to scare investors. The BP oil spill… the European debt crisis… lower than expected GDP growth… flagging retail sales… and high unemployment just to name a few.
These are all legitimate concerns.
But when I look at earnings expectations, I have to wonder if the market correction is overdone.
Analysts are expecting a strong second half of the year for S&P 500 companies. They’re looking for second quarter earnings to jump 27% over the year ago quarter. And they’re forecasting fourth quarter earnings to increase 12%.
Despite this positive outlook, the S&P 500 Index is trading at a historically low price to earnings (P/E) ratio.
The P/E on the S&P 500 Index is currently less than 13x the earnings estimate for the next 12 months. This is well below the long term average of 18x. In fact, we’re now sitting on the lowest P/E since the early 2009 bear market lows!
With earnings season about to begin, it seems to me we’re in a perfect environment for a strong market rally.
It may not happen today or even tomorrow. But if we can see better than expected earnings from key bellwether stocks, this market could certainly slingshot higher.
The best bet for earnings outperformance is the technology sector.
Strong demand for personal computers, flat-screen displays, and other personal electronic devices is driving growth. And earnings estimates for the tech sector have been creeping higher in recent days.
One tech industry expected to have a strong second half is hard disk drive manufacturing equipment.
Hard disk drive makers are scrambling to increase production capacity. Strong sales of personal computers and laptops are driving demand for disk drives. Every computer needs one.
A company benefiting from this trend is little-known Intevac (IVAC).
IVAC is a leading manufacturer of equipment used to deposit thin films onto magnetic disks used in hard disk drives. According to the company, Intevac systems make up about 60% of the installed capacity of disk sputtering systems worldwide. (Sputtering is an important step in the production of magnetic disks for hard disk drives.)
Hard disk drives are a key component of various high tech devices. They’re the primary data storage device in personal computers, enterprise data storage, personal audio and video players, and video game systems.
IVAC’s customers list reads like a who’s who of the electronics industry. The company’s major customers are Fuji, Hitachi, Seagate, and Western Digital.
After a difficult 2009, IVAC is seeing strong growth this year.
Just look at the company’s first quarter numbers…
Revenue soared 169% to $33.1 million. Net income improved from a loss of $5.8 million a year ago to a profit of $1.4 million. And earnings increased from a loss of $0.26 to a profit of $0.06 per share.
And this is just the beginning.
Tight supply and strong demand for hard disk drives is driving sales. We should see further revenue gains going forward as this market dynamic is expected to last throughout the year.
Hard disk drive manufacturers are flooding IVAC with orders. They’re in a race to expand production capacity. Since the end of last year, the company’s order backlog has surged over 95% to $152.3 million.
The outlook for this year and next is very good.
Analysts are expecting the company to generate earnings of $1.08 per share in 2010. That’s a huge turnaround from last year’s loss of $0.46 per share. And they’re looking for earnings to jump 24% in 2011 to $1.34.
Despite the strong growth outlook, IVAC shares are badly misvalued by the market.
At a recent price of $10.67, the shares are trading at just 9.9x the 2010 estimate. That’s very low for a company expected to grow earnings 17.5% a year over the next five years. It works out to a PEG ratio of 0.58.
In other words, IVAC is trading at a 42% discount to their projected growth rate.
The shares offer terrific profit potential from current levels. If the company’s P/E expands to just the market average of 18x, the shares are worth $19.44.
That’s upside potential of 82%!
Take a look at IVAC for your own portfolio. They’re a great way to profit from the anticipated strong second half for technology stocks.
Category: Stocks
