Author: Gerald Gehman
Covestor model: Undervalued Growth Companies
Disclosure: Long EZCH, FNSR, QUIK, ANAD, LSCC, DRWI, TWER, TSEM
Worldwide broadband usage, particularly video, is projected to grow explosively for a number of years. Eight of the eleven companies in my Covestor portfolio are coiled to participate in this growth. On February 25, 2011, Covestor reported that my total portfolio has grown by 24.02% since inception in October, 2010. Over 80% of my portfolio is invested in these stocks.
Video products and video-enabled social media platforms such as YouTube and Facebook are propelling this demand. The momentum is worldwide, and across all classes. I believe this bodes well for this model going forward.
The existing internet structure cannot efficiently handle this projected growth. It is also not economically feasible to build a new network. Fiber optics will be used in larger capacity situations, but this solution is expensive. Other methods must be used to expand the capability of the existing (legacy) networks.
Ethernet technology is widely accepted as the most viable method to efficiently speed up and expand the capacity of the existing internet backbone. Other solutions will be used to improve other specific situations.
Portfolio holding EZCH (EZchip Semiconductor, Ltd) designs and sells Ethernet Net Processing Units that speed up and expand existing internet capacity. Their chips are used by six of the seven large Carrier Ethernet vendors. EZCH has existing business and design wins for new products that will produce increasing revenue and profits until possibly 2016. EZchip has already designed and is designing new products that will expand their product mix, customer base and profit potential. EZCH is 25% of this portfolio.
Portfolio holding FNSR (Finisar Corporation) has an strong reputation for designing and manufacturing fiber optics products. FNSR always had a high fixed cost structure. Back to the year 2006, there was too much manufacturing capacity in the industry and profits suffered. FNSR streamlined its business and built cheaper production facilities. Now demand for fiber optics equipment is growing and is projected to continue growing. At higher volume levels, Finisar’s fixed costs are covered, so the company is in position to make significantly higher margins on incremental business. FNSR is 21% of this portfolio.
Portfolio holding QUIK (QuikLogic Corporation) produces Customer Specific Standard Products (CSSPs) for the mobile handheld market (e.g., Tablet, Smartbook, Smartphone, Datacard and Mobile Enterprise). Mobile data traffic is growing at a rapid pace, and video plays an increasingly important role. QUIK designs and produces chips that are specifically designed for mobile user experience and can be brought to market in a very short time frames. QUIK is starting to receive orders on their display and visual enhancement (VEE/DPO) technology. This product increases energy efficiency. More importantly, VEE allows mobile screens to be read in bright sunlight, or low light. An investment in QUIK was highly speculative a few years ago, but has now become a standard businessman’s risk with great opportunity. QUIK is 10% of this portfolio.
Portfolio holding ANAD (Anadigics, Inc.) is one of a limited number of companies that uses sophisticated materials to make mixed signal chips for advanced wireless applications. These chips are used in particular in the wireless video devices that are driving the growth in broadband usage. A few years ago, Samsung was ANAD’s largest customer and was dependent on its supply of chips. ANAD was building a plant in China and domestically could not keep up with the demand. ANAD temporarily lost the relationship with Samsung and other customers. ANAD has now established adequate production facilities and the Samsung relationship is repaired. The demand for ANAD chips is growing. ANAD is in position to make significant profits going forward. ANAD is 9% of this portfolio.
Other companies that will participate in internet growth are:
LSCC – Lattice Semiconductor Corp. (6% of portfolio)
DRWI – DragonWave, Inc.) (5% of portfolio)
TWER – TowerStream Corporation (4% of portfolio)
TSEM -Tower Semiconductor Ltd (3% of portfolio)
Gerald P. Gehman
