Monitoring Growth

In this digitally-accelerated era, one sector that consistently stands out as a powerhouse of innovation and growth is the electronics industry within the IT sector. Electronics are pivotal in enabling NASA’s space missions, deep-ocean explorations, and climate monitoring systems – projects that have transformative impacts on society and scientific understanding. Besides, the products and services provided by advanced electronics firms serve as the bedrock of cutting-edge technologies like the Internet of Things (IoT) and Artificial Intelligence (AI), and also have a far-reaching impact on  our daily lives.

What makes the sector uniquely compelling for investors is its robustness, driven by unrelenting consumer demand and enterprise requirements, even in the face of global uncertainties. For the discerning investor, investing in financially stable companies within this burgeoning field offers an added layer of security. Such companies are marked by strong balance sheets, consistent cash flows, and a proven track record. Their financial health equips them with the necessary resources to invest heavily in research and development, a key differentiator in an industry that thrives on rapid innovation.

Moreover, these companies are better positioned to navigate through economic downturns, effectively serving as bulwarks that protect shareholder value. Unlike startups and high-risk players that populate much of the IT landscape, these financially sound companies in the electronics industry offer a balanced portfolio option that merges both innovation and reliability.

Today, we are adding one such company to our Smart Investor holdings. But first, let us delve into a short update on the economy, markets, and Smart Investor calendar.


Economy and Markets: Looking Forward

There are several very important reports scheduled to be published in the next few days:

  • Later today, we will receive a second estimate on Q2 2023 GDP (Gross Domestic Product) Growth Annualized, released after the updates of data used to compile the report has been received by the U.S. Bureau of Economic Analysis (BEA).
  • On Thursday, we will see published a report on July’s Core Personal Consumption Expenditures, the Federal Reserve’s primary inflation measurement tool, used as the benchmark in its inflation targeting actions.
  • On Friday, we will get the reports on August’s Non-Farm Payrolls and Unemployment Rate. These reports are of utmost importance for policymakers, since employment, along with price stability, is one of the Federal Reserve’s mandates.

As for the stock calendar, the Q2 2023 earnings season for Smart Investor Portfolio companies is drawing to a close, with only Broadcom (AVGO) scheduled to publish its quarterly results this week.

The ex-dividend date for Cigna (CI) is on September 5th.


Today, we are adding a company whose electronic subsystems and instrumentation enable NASA missions, aircraft air control, deepwater oil exploration, medical X-ray detectors and radiotherapy machines, ADAS systems for autonomous vehicles, and more. The company we are adding has received praise from a Goldman Sachs analyst who called it, “One of the highest quality, most consistent, best managed companies in its sector.”

To make room for this valuable addition, we are letting go of a stock of another electronics company, which, despite its stellar fundamentals and wide business moat, has been stuck in a negative performance/sentiment loop with no short-term catalysts in sight to pull it out of the quagmire.


New Addition: Teledyne Technologies (TDY)

Teledyne Technologies Inc. provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include aerospace and defense, factory automation, air and water quality environmental monitoring, electronics design and development, oceanographic research, deepwater oil and gas exploration and production, medical  and pharmaceutical research.

The company operates in four segments: Instrumentation, Digital Imaging, Aerospace & Defense Electronics, and Engineered Systems. The Instrumentation segment provides monitoring instruments primarily for marine and environmental applications. The Digital Imaging segment contributes the largest proportion of revenue, and includes image sensors and cameras for industrial, government, and medical customers. The Aerospace & Defense Electronics segment provides electronic components and communication products for aircraft. The Engineered Systems segment provides solutions for defense, space, environmental, and energy applications.

Teledyne’s core markets – instrumentation, digital imaging, aerospace and defense electronics and engineered systems – are characterized by high barriers to entry and include specialized products and services which are very difficult to commoditize. In addition, the company has gained a lead over its competitors by establishing a customer and company-sponsored applied research and development (R&D) center that augments its existing products and provides specialty solutions.

Teledyne was founded in 1960 in California and initially focused solely on R&D for the U.S. Government and Rockwell International Corporation. After many iterations and changes during its years of existence, today TDY is an industrial conglomerate combining around 100 areas of business and providing cutting-edge R&D services, technologies, and solutions to hundreds of customers in various industries.

Today, Teledyne is a Fortune 500 company, commanding a market capitalization of $19.6 billion, with a workforce of almost 15,000 and annual revenues of $5.6 billion. It belongs to the IT sector (Industry: Electronics).

The company has achieved its wide moat and product, as well as customer diversification, through organic growth and strategic acquisitions. It has bought 67 companies over the years, with the latest acquisitions being ChartWorld in January 2023 and ETM-Electromatic in October 2022. Teledyne’s acquisition of FLIR Systems in 2021 has caused the company’s revenues to almost double within a year. FLIR’s expertise is intelligent sensing solutions for defense and industrial applications, which expanded TDY’s capacity and added to its list of governmental contracts.

Teledyne’s operations are primarily located in the United States, Canada, the United Kingdom, and Western and Northern Europe. Its largest market, responsible for over 50% of annual sales, is the U.S., with the additional 25% derived from European market.

The largest business segment is Digital Imaging, responsible for 56% of total revenues. However, the fastest-growing segment in terms of operating revenue is Engineered Systems, which currently represents 8% of total revenue. The company’s largest single customer is the U.S. government, with 22% of revenues derived from governmental contracts.

Teledyne is a financially healthy company; despite the numerous acquisitions, its debt-to-equity ratio is a low 39%. TDY’s debt is extremely well-covered by operating cash flow, while the cash and cash equivalents it holds are a multiple of its debt. The company’s liquidity status is also solid: it finished the latest reported quarter with $364 million in cash and cash equivalents, and free cash flow of $163 million.

Moreover, long-term government and commercial contracts provide stability, as well as visibility and predictability of revenues. The company also takes pride in its consistent profitability. The company’s revenues have been growing at an average annual rate of 21% in the past three years, while EPS has increased by 15% annually. In Q2 2023, Teledyne has beaten analysts’ EPS estimates, as it did in 8 previous quarters in a row (since the Covid-19 pandemic hit to the business activity dissipated). The company boasts a robust operating margin of 18.5% and a solid net profit margin of 14%.

The company, in its current form as Teledyne Technologies Inc., has been trading on the NYSE since 1999. The company’s stock has displayed moderate volatility versus the general market, but still outperformed the S&P 500 (SPX), rising 32% in the past five years versus the index’s 26%. In the past 12 months, TDY has gained 10%, similarly to the SPX’s performance.

Since Teledyne published its strong second-quarter results in July, its stock has been gaining momentum, rising over 8% in August while the S&P 500 has been in decline. As a result of its outperformance, the stock currently trades at a TTM P/E of 25.4 and a Forward P/E of 26, representing about 3% premium to its sector.

TipRanks-scored top analysts foresee an average upside of 18.2% for the stock in the next 12 months, thus making the current valuation look adequate as it is anticipated to increase. This opinion is shared by insiders who have bought their company’s shares, as well as by hedge and mutual funds, some of which have opened large new positions with the stock in recent weeks. Individual investors have also been quite bullish toward the stock.

TDY carries a “Perfect 10Smart Score rating on TipRanks with a “Strong Buy” recommendation:

A short while ago, Goldman Sachs analysts upgraded Teledyne to Buy from Neutral, adding that it is one of the “highest quality, most consistent, best managed companies” in its sector. We have to agree that Teledyne is a great quality stock with solid growth prospects; we believe that now is a good time to gain exposure to TDY, before the expected further gains. To conclude, we are certain that Teledyne will be a very valuable addition to the Smart Investor portfolio.


New Deletion: Keysight Technologies (KEYS)

Keysight Technologies, Inc. provides electronic design and test instrument equipment and software worldwide. The company’s products and solutions are used across several industries, including communications, networking, aerospace & defense, automotive, energy, semiconductor, electronics, finance, and education. The company’s hardware products include oscilloscopes, analyzers, meters, test and calibration systems, and many more. Keysight’s software products include workflow, testing, application, control, network, and connectivity solutions. KEYS also provides security hardware and software, modular instruments, and many other products and services. Keysight is the leading player in testing applications for a variety of different end markets.

Keysight Technologies was founded in 1939 and, after a number of iterations, became a fully separate electronic measurement company in 2014, publicly traded on the NYSE under the ticker KEYS. It is a large-cap company belonging to the Information Technology sector (Industry: Electronics). The company caters to more than 30,000 customers around the globe, ranging from startups to giants like Apple (AAPL) and Boeing (BA), as well as NASA and other government agencies.

Keysight’s finances are very strong, with a low debt-to-equity ratio and great cash position. It is also very profitable, scoring high on ROE and ROA metrics and demonstrating industry-leading margins. KEYS has been growing revenues at a CAGR of 11%, and EPS – at a CAGR of 25.5% in the past three years. Its latest quarterly report, published in mid-August, featured revenues in line with estimates and EPS which surpassed analysts’ expectations by a wide margin, extending the 12-quarter forecast-beating trend.

However, Bank of America Securities analysts downgraded KEYS to “sell” ahead of its earnings report, sending shares lower, on the expected prolonged decline in orders connected to 5G technology. When a couple of days later the company’s management lowered its outlook for the current quarter’s revenues, spooking investors, the negative momentum for the stock was set in motion. As the stock declined, analysts cut their price targets, which added anxiety and led to more selling. Looking at performance charts, some institutional investors decreased their exposure to KEYS to cut losses, which, of course, served as another scare factor for retail investors.

Mind you, the outlook cut was not disastrous, and the company expects to finish the year with higher earnings than analysts project. However, sometimes the negative market sentiment works as a self-fulfilling prophecy, with no end in sight. Thus, Keysight’s stock has gotten into a “Catch-22” situation.

We still believe that KEYS is a good company and a solid investment idea. We genuinely hope that KEYS can break out of this quagmire soon, and then we expect to reevaluate the company for our Smart Portfolio. But for now, we think it is better not to fight the market, and instead, sell the stock.


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.

Our prestigious club’s ranks have expanded this week, and they now include six stocks: GE, ORCL, TECK, AVGO, ALV, and CDW.

The closest runner-up is now ANET with a gain of 22.4% since we included it in the Portfolio. Will it join the ranks next week, or will someone else outpace it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, September 6, 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 Changes


New Portfolio Additions

Ticker Date Added Current Price
TDY Aug 30, 23 $417.91

New Portfolio Deletions

Ticker Date Added Current Price % Change
KEYS Jun 7, 23 $132.26 -18.09%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $115.33 +106.39%
ORCL Dec 21, 22 $120.65 +48.04%
TECK Dec 8, 21 $41.15 +47.92%
AVGO Mar 22, 23 $889.93 +41.05%
ALV Sep 21, 22 $97.20 +36.25%
CDW Jun 29, 22 $207.54 +31.29%
ANET Jun 21, 23 $185.45 +22.40%
WCC Sep 14, 22 $161.41 +20.31%
AMAT May 31, 23 $149.98 +12.51%
GD Dec 22, 21 $226.15 +10.99%
DAL Feb 8, 23 $43.77 +10.98%
ADM May 10, 23 $81.61 +9.34%
MOH May 3, 23 $322.28 +7.60%
PERI May 17, 23 $33.60 +7.49%
INMD Jun 28, 23 $38.81 +5.86%
CHKP Jul 19, 23 $134.71 +5.80%
JBL Jul 5, 23 $115.40 +5.69%
ACN Aug 16, 23 $323.45 +5.14%
CI Jul 12, 23 $281.64 +4.82%
APD Apr 26, 23 $293.66 +2.79%
TSM Aug 23, 23 $95.08 +1.38%
UNH Apr 19, 23 $492.83 +1.36%
VRTX Aug 2, 23 $351.26 +1.01%
APH Aug 9, 23 $87.91 -0.60%
ALG May 24, 23 $171.66 -2.00%
WNC Mar 15, 23 $22.54 -6.74%
DE:IFX Apr 5, 23 $33.01 -6.99%
GPK Jul 26, 23 $22.25 -7.10%
EPD Jan 15, 20 $26.81 -7.30%
OXY Oct 5, 22 $62.40 -7.88%
LW Apr 13, 23 $96.70 -11.67%
ALB Jun 14, 23 $197.75 -12.65%



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