Flexing Electronic Muscle

From hair dryers to space shuttles, our everyday lives are becoming increasingly dependent on electronics. This reliance is expected to continue growing exponentially as our digital, connected  devices continuously require more and more control modules, system integration solutions, cooled racks, printed circuit board assemblies, and other electronic accessories.

In this week’s Smart Investor newsletter, we present a nuanced analysis of one of this sector’s market leaders, equipping investors with the knowledge needed to make well-informed decisions in a constantly evolving landscape.


Last Week’s Portfolio Movers

An important notice regarding Super Micro Computer (SMCI): shares have tumbled over 21% since last Friday, after Wells Fargo said that a strong increase in future profits thanks to its AI-supporting server and storage solutions are already priced in the stock. These developments, coupled with the broad market’s downward shift, sparked a sell-off. Investors rushed to take profits after SMCI’s blistering rally of over 790% in the past year, much of which occurred over the past two months.

This strong melt-up in a stock hints at a bubble, making the stock vulnerable to corrections. However, SMCI is one of the Smart Portfolio’s strongest-conviction buys, supported by the company’s stellar fundamentals, delivery, and innovative prowess. We purchased the stock on November 8th for $254.38 per share, much lower than the current, undoubtedly over-inflated price. While we anticipate further correction on profit-taking, that doesn’t change our conviction about SMCI’s long-term potential. However, we understand investors’ concerns and are closely watching the developments, mindful that the correction may accelerate.


❖ Applied Materials (AMAT) shares hit a fresh record high in the past week after the semiconductor equipment and services company reported better-than-expected results for the previous quarter and provided upbeat guidance for the current quarter.

❖ Stellantis (STLA) shares rose to a record, as the automotive group missed analysts’ Q4 2023 EPS forecasts, but delivered record net revenues, net profit, and FCF for full-year 2023. STLA stocks were also strongly supported by the company’s announcement of a dividend increase and an approval of a share buyback program of $3.2 billion.


Portfolio Earnings and Dividend Calendar

❖ The Q4 2023 earnings season for Smart Investor Portfolio companies is winding down, with only Coca Cola FEMSA (KOF) and EMCOR Group (EME) scheduled to report in the next few days.

❖ The ex-dividend dates for CDW (CDW), Electronic Arts (EA), and Crane NXT (CXT) are February 23rd, 27th, and 28th, respectively.



Weekly Portfolio Trades

Today, we are performing two changes to the Smart Investor Portfolio: we are adding a formidable player in the electronics contract manufacturing services, Flex Ltd., and selling Deutsche Bank AG.


New Buy: Flex Ltd. (FLEX)

Flex Ltd. (previously known as Flextronics) is a multinational diversified manufacturing company, providing contract manufacturing services to global companies in automotive, cloud, communications, healthcare, and other industries. The company offers comprehensive electronics design, advanced manufacturing, product management, and supply-chain solutions through its 130+ facilities across 30 countries.

The company was founded in 1969 in Silicon Valley, California, but in 1981 became one of the first U.S. firms to expand offshore by setting up a manufacturing facility in Singapore. The company is headquartered both in Singapore and Austin, Texas. The company’s shares have been traded on NASDAQ since 1994.


Diversified Suite of High-Quality Businesses

Flex Ltd. is the third-largest global electronics manufacturing services (EMS) and original design manufacturer (ODM) company by revenue. It has a market capitalization of $12 billion and annual revenues of $30 billion.

The company runs a very diversified suite of business lines, with significant revenue streams coming from its relatively new niches such as consumer, medical industrial, and automotive industries, while its core electronics and technology OEM businesses continue to perform well.

The company operates through two segments: Flex Agility Solutions (FAS) and Flex Reliability Solutions (FRS). It previously operated a third segment, solar-energy generation software unit Nextracker, which was spun off and IPO’d in February 2023. The completion of the spin-off of all of Flex’s remaining interest was announced in January 2024.

The FAS segment, responsible for ~60% of total revenues, serves communications, cloud, and consumer lifestyle & devices end markets. The FRS segment serves the automotive, healthcare, and industrial end markets.

The diversified core businesses are supported by several tailwinds, such as cloud and networking demand strength (now intensified by AI-related demand), healthcare sector automation and digitalization, and stable growth of industrial applications demand, among others. Current headwinds include weakness in EV sales, suppressing end-market demand, and consumer end-market weakness (although this sector is expected to return to strength as the overall economic picture brightens).


Strong Fundamentals and and Robust Delivery

Flex Ltd. boasts robust financial health with a low net debt-to-equity ratio as the company has been reducing its leverage over the past five years. FLEX’s debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over.

The company’s capital efficiency metrics – Return on Equity, Return on Assets, and Return on Invested Capital – are higher than the averages for its peers in the Electronics industry. Flex’s profitability metrics, including margins, are average for the industry.

Over the past three years, FLEX’s revenues have increased at a CAGR of 8%, while its earnings-per-share surged at a CAGR of 26.3%. The company last released its quarterly results on January 31, 2024, reporting for its fiscal Q3 (ended December 31). The report featured a strong beat on revenue and earnings expectations. In fact, FLEX has surpassed analysts’ EPS estimates in all quarters for which these estimates were available. In FQ3, Flex grew its revenue by 8% year-over-year, and operating income increased by 28%, while operating margin expanded by 190 bps, and adjusted EPS surged by over 57%. Following strong execution in FQ3, the company’s management lifted FQ4 and FY 2024 revenue guidance.


Shareholder Returns: Stock Performance and Buybacks

Flex Ltd.’s stock had been gently rising through the years, taking off in recent months on the back of strong financial results, rising growth prospects, and analyst price-target upgrades. In the past three years, the stock rose almost 100%, with the bulk of the gains attributable to its performance over the past 12-months, when the stock surged by 63%. On February 15, FLEX reached its highest level since October 2000, but gave back some gains due to profit-taking and the broad-market decline.

Despite the recent FLEXX stock run-up, its valuation remains more than reasonable. The stock is trading at a discount to the IT sector and at the lower end of the valuation range for its peers in the Electronics industry. In addition, based on projected cash flows, the stock is trading ~20% lower than its fair value.

Stock price appreciation is not the only allure for FLEX’s shareholders, as the company has a capital allocation strategy with a primary focus on capital return. The company commenced a buyback program in August 2023, which authorizes the management to repurchase up to 20% of the company’s issued share capital. Since the announcement of the program, Flex has repurchased 4.4% of its float for $470 million.

TipRanks-scored top Wall Street analysts see an average upside of 7% for the stock over the next 12 months. However, given Flex’s track record of surpassing analysts’ estimates, the stock may also surprise on the upside, despite the recent upsurge. FLEX carries a TipRanks Smart Score rating of “Perfect 10” with a “Strong Buy” recommendation:



Flex Ltd. is a well-managed company with a significant position in diversified, growing  markets. It features effective capital allocation, a history of healthy financial performance, and positive revenue and margins outlook, while its modest valuation adds to its appeal. The company’s alignment with shareholder interests also makes it an attractive investment opportunity. As such, we believe it can be a valuable addition to the Smart Investor portfolio.


New Sell: Deutsche Bank AG (DB)

Deutsche Bank AG is a German multinational investment bank and financial services company headquartered in Frankfurt. It is the largest bank in Germany and the world’s 25th-largest bank by assets. DB shares are traded on the NYSE.

DB has been running a radical strategic restructuring program since 2019, aimed at transforming its business model to become more profitable, improving shareholder returns, and driving long-term growth. The restructuring has been very effective, leading to a sharp rise in profitability and strengthening the bank’s financial health.

The bank smashed analysts’ EPS estimates in the past two quarters, underscoring that its strategic overhaul is bearing fruit. It must be said that Q4 estimates were so low that a 27% year-on-year EPS drop was far better than expected. The earnings-per-share fell as the bank was hit with a higher tax bill and a larger provision for loan losses, mainly due to its exposure to the ailing U.S. commercial real estate sector and write-downs connected to a failed acquisition.

The bank’s shares languished over the past year, notwithstanding temporary earnings-related spikes. Deutsche Bank’s management tried to boost the share price, announcing in February that the bank would cut thousands of jobs to reduce costs, while simultaneously increasing its dividend and buybacks. These measures haven’t impressed investors, as they seem to have done little to raise the firm’s fundamental value.

In addition, there is more trouble brewing for the bank in the short term. Deutsche Bank’s retail banking business, its main revenue driver, enjoyed the windfall from higher interest rates in Europe. EU key rates are expected to be reduced over the next several quarters, as the bloc’s economy was stagnant in the previous quarter and concerns about a recession are on the rise. Germany’s financial regulator has also recently warned that 2024 will be difficult for banks, as the bloc’s largest economy grapples with its own property crisis.

There are also DB-specific problems, as Germany’s regulators threatened to fine it for incomplete security measures against money laundering and terrorist financing. The deadline for fixing the unsound-practice controls is this coming October; the bank will have to invest additional efforts and money to improve internal control systems or face heavy fines.

Deutsche Bank’s long-term potential remains intact, based on its strategic restructuring revamping profits, and shareholder alignment. However, the short-term outlook has turned cloudy, with uncertainties on the rise. We may reassess the company later on, but for the time being, we believe it is appropriate to sell the stock.


Portfolio Stocks Under Review

In this section, we will flag stocks that may be let go from the portfolio.

General Dynamics (GD): We are taking the aerospace and defense company off the list of stocks under review, following its very strong results in Q4 2023. These results featured substantial revenue and earnings growth. The outlook for this year has brightened, and analysts expect the company to continue increasing revenues and expanding margins as demand for defense products is slated to rise, especially in Europe.

¤ Electronic Arts (EA): The videogame company remains under review for potential sale with low urgency, as we continue to watch the trends in games sales, which depend on the overall economic situation. EA is a financially healthy, well-run company, but its 2024 growth prospects depend on the market rebounding from 2023’s weakness.

¤ General Electric (GE): The soon-to-be former industrial conglomerate is placed under review for potential sale with medium urgency. On the one hand, the company’s recent filings showed strong revenue growth, improving profitability, and declining leverage; analysts are positive about its near-future business trends. On the other hand, the stock has risen over 80% in the past 12 months and recently hit its six-year high. GE shares are now trading at a very overvalued level, which leaves it with limited further upside while increasing the risk of correction.

Notably, GE has recently filed a registration statement for the planned spin-off of GE Vernova, GE’s power-generation unit. The spin-off is expected to take place as soon as April, after which GE will cease to be a conglomerate, continuing as GE Aerospace, a pure-play aviation and defense stock. The split-up is viewed as a positive development for GE, since its commercial jet-engine business is far more profitable than power generation. However, the aviation business is highly cyclical, and GE stock may become much more volatile and dependent on economic developments without the stabilizing protection of other revenue units. In the immediate and short term, the impending split will force analysts to reevaluate the stock, which can lead to increased volatility and spark a post-split sell-off.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets wobbled over the past week, but our exclusive club has gained a new member, Parker Hannifin (PH), which rose 30.6% since its purchase date four months ago. Now, the Winners Club includes 13 stocks: SMCI, GE, AVGO, ANET, CDW, ORCL, TSM, MOH, AMAT, ULTA, STLA, GD, and PH.

The next in line to enter the Winners’ ranks are now Jabil (JBL) and Check Point (CHKP), with 26.2% and 25.8% gains, respectively, since their purchase dates. Will one of them be able to close the gap, or will someone else outrun them to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, February 28th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Snapshot

New Portfolio Additions

Ticker Date Added Current Price
FLEX Feb 21, 24 $27.73

New Portfolio Deletions

Ticker Date Added Current Price % Change
DB Jan 3, 24 $12.97 -4.70%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $787.57 +208.37%
GE Jul 27, 22 $148.62 +165.96%
AVGO Mar 22, 23 $1226.55 +94.41%
ANET Jun 21, 23 $259.61 +71.35%
CDW Jun 29, 22 $241.79 +52.95%
AMAT May 31, 23 $189.14 +41.89%
STLA Sep 6, 23 $25.40 +39.87%
MOH May 3, 23 $401.49 +34.04%
TSM Aug 23, 23 $125.33 +33.63%
ULTA Nov 15, 23 $541.29 +33.61%
ORCL Dec 21, 22 $108.45 +33.07%
GD Dec 22, 21 $268.93 +31.98%
PH Oct 11, 23 $519.53 +30.60%
ITT Oct 18, 23 $122.37 +28.12%
CI Jul 12, 23 $341.35 +27.04%
JBL Jul 5, 23 $137.33 +25.77%
CHKP Jul 19, 23 $160.10 +25.75%
EME Nov 1, 23 $251.16 +21.70%
VRTX Aug 2, 23 $420.64 +20.96%
APH Aug 9, 23 $104.61 +18.28%
ACN Aug 16, 23 $362.95 +17.98%
AIT Dec 6, 23 $186.54 +13.23%
CXT Oct 25, 23 $58.53 +13.08%
TXT Nov 29, 23 $84.58 +9.97%
MCK Dec 13, 23 $506.74 +9.65%
UNH Apr 19, 23 $521.06 +7.17%
KOF Feb 14, 24 $100.29 +3.35%
EA Nov 22, 23 $141.04 +3.11%
CNC Jan 10, 24 $79.29 +1.64%
ON Jan 24, 24 $77.47 +1.33%
REGN Feb 7, 24 $946.87 +0.97%
WRB Jan 31, 24 $81.98 +0.43%
FLT Jan 17, 24 $272.91 -3.90%



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