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The Other Side of the Gadget Trades


The gadgets that sit in the shadows may be better stocks going forward because they are less crowded, their technology no less innovative and inarguably are more needed by more consumers, many of whom have expanding budgets.

So Research in Motion (RIMM) is on the tape with another spectacular quarter. There was only one constant at Citi's Technology Conference I attended last month, that was no matter how many new solutions were being discussed there was literally never one time that the guy or gal on either side of me didn't hold a Blackberry in their hand.

Remember a few months ago when many wondered what the iPhone might do to Blackberry sales? My opinion on Apple (AAPL) was made clear here, and the stock is up 81% since that article was posted.

Yet the launch of the iPhone I believed would actually benefit RIMM tremendously because, like a well-pitched game of baseball (Phillies fans may have trouble following this analogy), the key is changing the batter's/consumer's eye level. I believed consumers getting used to the idea of paying significantly more for a gadget thanks to the iPhone would benefit RIMM's future releases and higher price points. The neat gadgets coming out from Research in Motion, Apple, Nokia (NOK), and Garmin (GRMN) have been almost as impressive as their charts.

Anybody who wonders if MV is too bearish need only review the archives of several contributors to see that both sides of many trades and themes have been carefully fleshed out and in my view - as a subscriber more than a writer - has been valuable regardless of the direction of the markets. In that spirit, I'll offer a unique, often referred to as stupid when you look back later, idea on this gadget trade. I'll take the risk of wondering aloud if there might be four even more compelling longs. I am interested in what gadgets sit in the shadows of these monsters that may, just may, be even better stocks going forward because they are less crowded, their technology no less innovative and inarguably are more needed by more consumers, many of whom have expanding budgets.

Farmer's Gadget

I started sharing my version of a gadget trade with anybody who asked while Garmin was sweeping everybody but me off their feet. I missed this trade. There are some drawbacks of a four-minute commute, I suppose. I would share my work on another global-positioning-system (GPS) company that I did see the demand for, however, and it was a company most folks had never heard of – Trimble Navigation (TRMB).

Most surprising to anybody who looked was the fact that Trimble had actually outperformed Garmin over the past five years, +1173% to +988%. Clearly, neither group of shareholders would have a hard time affording either device with those kinds of numbers. But my concern is those who didn't own the shares and what their budgets looked like. I like the Trimble customers' wallets more.

Trimble provides advance positioning solutions to commercial and government customers. They have guided construction requiring extreme precision for engineers and you know how I feel about the direction of that business for years to come. But, there is a different customer that I'm even more excited about. This group's budgets are about to be completely re-written, higher, after another bumper crop of a year - farmers. Very few consider farmers for a gadget trade which tends to happen to a group whose idea of a high-tech in their pocket can be a new comb. Understand that just as much precision can be useful to guide tractors, spraying crops, planting seed, and harvesting applications.

Managing irrigation and drainage also benefits tremendously from guided positioning solutions. My longest longs surround the Farm trade, as I have detailed as often as I can. The next leg of that trade may be in finding the vendors they've never purchased from before but can now afford, especially if it makes their business substantially more efficient.


Few stocks have had a better run than Research in Motion. I have been quietly enjoying the work surrounding water-in-motion during that time instead. One of the stocks I own, the manufacturer of perhaps the most important gadget you've never seen, is Itron (ITRI). Understandably, more than four times as many analysts (35 to 8) have watched RIMM register a three-year average earnings growth of +31% per year. Meanwhile, Itron quietly poured on +42% of earnings growth per year over that same time.

Itron delivers solutions to utilities to optimize the delivery of energy and water. This ain't your Peter-the-meter-reader's company. The meter business, which they've been doing since 1850, is changing completely and upgrade cycles will affect almost every country in the world in order to manage precious and strained supplies of energy and water. The crisis in water management has my interest peaked the most. Consider there are more than 300 mln un-metered water connections and the majority of those are in developed nations.

Imagine the possibilities that will exist in developing nations looking to make their first connections.
The average American household uses 150 gallons of water per day compared to 13 gallons worldwide. In the U.S., water demand tripled over the last 50 years despite the population only growing 50%. Near-term, even bigger opportunities exist, perversely, in the developed nations because of their development – the pipes are too old. It is estimated that in the U.S. we leak 30 bln gallons of water per year. You won't see Itron on any "hot technology picks" list anytime soon but its mobile devices, leak detection and software are remarkably sophisticated and needed far more than most technology.

Sweet Songs

Apple has had an incredible run, and posted a +73% rise in earnings over the past four quarters. While I remain long the stock, I've been listening to something potentially even sweeter than the three-billionth iTunes song just downloaded. The speech recognition technology from a little company called Nuance (NUAN) has quietly topped that earnings growth with +77% over those same four quarters.

Nuance is the most speculative of this bunch, with significant risks, but perhaps could affect you personally before any other. Its speech recognition technology is already performing and flourishing in many industries for many applications. My interest, however, was only born when it showed up in doctor's offices. I have watched secretaries wearing headphones all day long furiously trying to type, rewind, type, check again, and type some more while trying to keep us with a doctor's recorded voice on a Dictaphone, hopefully not missing or mistaking too much since lives kinda depend on it.

The ability to transcribe a doctor's notes from a Dictaphone (Nuance acquired Dictaphone Inc. in 2006) into a digital record will save and improve countless lives. The most innovative business on the planet – health care - is light years behind in adopting technology to run its own businesses.

Under the Hood

As much hype as the iPhone gets and as popular as the Blackberries are in the U.S., the most advanced phones in demand globally come from Nokia (NOK). Their phones are now at a level beyond cool (which is about 3.5 levels beyond this author), but would you guess there are even better margins in dirty old bulky radios? The EBIDTA margins at Harris (HRS) are 17% versus 13% at Nokia. The smaller our cell phones keep getting, the more our need for the big radios held in the hands of the military has grown. Our military relies on Harris for everything from several generations of the Falcon radio on the ground to the most advanced satellite controlled imagery from above. Opinions on defense spending varies on Wall Street and risks abound, but my opinion is that it will continue to expand more than any of us would prefer and perhaps significantly.

But as a shareholder I am even more interested in what they are doing behind the curtains, connecting some of the same gadgets everybody knows and loves while never even having heard of the "brains" of those operations, which often come from Harris. Harris is part of the backbone for everything from GSM, 3G, WiMax, to wireline operators. It is the #1 independent provider of wireless transmission network solutions in North America, yet only command 15% of the global market where they are growing in 135 countries with plenty of room to expand.

When it comes to digital technology it seems to have their hands in everything when you study their customers. It works on HD transmission, video infrastructure, graphics, digital media management, mobile television, and integrating these new solutions for the broadcasters. It was fascinating to watch, as I did, video from the command center at XM Satellite Radio (XMSR) and how Harris integrated the 160+ channels with fewer people then they started out with, who did the same for half as many channels. The CEO of XMSR described Harris as the "brains" of their system.

I wish I had its technology for my calls, if I could get anywhere close to the 99% accuracy they provide one of its other customers. Harris feeds HD video from two-dozen remote cameras throughout stadiums to the instant replay referees for the NFL. I once listened to the head of NFL referees describe the remarkable difference and digital clarity a referee now has when he sticks his head under that hood on the sideline to see every inch in high definition from a number of different angles.

Need vs. Neat

Trading is not nearly as clear as those replays. The best opportunities typically exist where things are more unclear, and importantly, more un-crowded.

Below is a comparison between GRMN, RIMM, AAPL, NOK on the right, and TRMB, ITRI, NUAN, HRS on the left, each number is an average the group of four.

Need Neat
Price/Earnings 32 42
Price/Sales 4 8
Price/Cash Flow 23 38
3-Year Earnings Growth +46% +42%
Market Capitalization $4.8 bln $89 bln
# of Wall Street Analysts 10 24
# of Mutual Funds Long 470 1227

Make no mistake, they have plenty in common as well. They all carry tremendous risk at these levels. I use tight sell disciplines to answer my own concerns. They also have extraordinary performance in common, and yet as a group continue to surprise the Street with even better results than are expected. The last quarter saw the average of all eight stocks' earnings surprise exceed the estimates by more than +20% each. What separates the group, in my mind, is the fact that many who want to be long "Neat" already are, and many who may want to be long "Need" have never heard of these stocks yet. Ultimately that's what matters most, when secular and organic growth meets demand from new shareholders.
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Positions in AAPL, NUAN, TRMB, ITRI and HRS.
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