December 28, 2007
We'd all like a good play on China, but the prices are just too high ... or are they?
Companhia Vale do Rio Doce (NYSE: RIO) is the largest producer of iron ore in the
world, and China is its largest customer. Vale, as it's called, is also a top producer of strategically impor-
tant nickel, as well as copper, other metals and minerals, and coal.
The stock is up 359% in the 30 months we've owned it (about 12% a month). Yet, astonishingly, the
shares still sell at a modest 15 times current earnings. The market still thinks of miners as cyclical stocks,
ignoring the huge long-term growth from billions of people still flooding into the free markets since the
fall of communism. Prices for iron are projected to raise 25% in 2008. Vale's earnings will be
sensational. Another 300% in three years looks doable. Buy Companhia Vale do Rio Doce up to $40.
\'O2Micro has a strong position in the notebook computing market and a growing position in the LCD monitor and LCD TV markets. Management has focused investments into these new vertical markets, attempting to broaden its product portfolio.
\'September quarter top and bottom-line surpassed the consensus estimate. Forward guidance is for a 1-7% revenue increase. The LCD TV markets represent an opportunity to grow its revenue base and boost margins to the low sixties. Consequently, we are upgrading the shares of OIIM to a Buy rating.
\'The shares are currently trading at a 13.4x multiple of its 2008 earnings estimate (P/E). The long-term potential of many of the new products being developed and deployed should drive future growth. Earlier design wins are expected to begin contributing revenue in 2007 and have done so. The company is expected to launch new products in the LCD/LCD TV, battery management and VPN/firewall areas through the remainder of the year.
\'The persistent weakness in the notebook segment may signify a fundamental shift in the product mix of the company. However, new products have begun to reverse the slide in notebook sales. Consequently, we believe the stock will trade at higher valuation metric levels. We are setting our price target to $18.00.\'
The company designs proprietary analog semiconductors used in LCD TV's, LCD
computer monitors, notebook computers, and other electronic devices. Its LCD invert-
er chips provide backlighting in liquid crystal displays, and their solid position in this market is backed
by more than 300 patents and a 600-person engineering team in China. O2 Micro has vigorously
defended its patent portfolio in court, recently winning major judgments against Sony and Samsung.
Driven by higher sales volumes with customers who lost to O2 Micro in court and the hot LCD market
overall, O2 grew revenue by 30% over the last 12 months. In 2008, we expect the company will grow rev-
enue between 25%-30% and earn $1 per share as profit margins expand due to lower litigation expense.
With projected earnings growth of nearly 50% next year and a current P/E of 13 times, we believe O2
Micro represents a great growth opportunity at a very reasonable price.
December 11, 2007
Knock on wood? That's what the market did when Lumber Liquidators went public last month. The hardwood-flooring specialist was hoping to go public at $12 to $14 a pop, had to settle for $11, and is now trading in the single digits.
"Of course," you say. The housing market is in a funk. There's no need for flooring if there's no appetite for the house as a whole. But that's not a fair assessment. In an Associated Press article that followed the disappointing IPO, the company's CEO pointed out that 80% of the company's customers are existing homeowners looking to spruce up their present digs. In fact, even though demand for hardwood flooring in general has been waning, Lumber Liquidators has rattled off 23 consecutive quarters of same-store-sales gains. Comps actually clocked in 8.6% higher through the first nine months of 2007.
Now, I'm not naive. A lot of homeowners need to borrow money for a hardwood makeover, even at Lumber Liquidators' rock-bottom prices, and the subprime fiasco is making creditors very particular about their lending habits. Then again, the Federal Reserve's rate cuts may very well spur cash-out refinancing to fuel home-improvement projects. Until comps head lower, I'd argue that Lumber Liquidators is immune to the housing market's weakness.
I singled out Cabela's last month as a door-buster stock. The outdoor-gear superstore concept -- a literal feast for the senses with its theme park-esque stores that feature large fish tanks and wildlife replica displays -- needs the market to breathe the fresh air outside.
Sure, profits took a small hit this past quarter, but the shares are now trading at just 10 times next year's analyst profit target of $1.62 per share. You don't need to look through the scope of one of its hunting rifles to see that cheap is within the crosshairs at Cabela's.