Following Peter Lynch's advice is a great way to make money. His bite-sized bits of wit and wisdom put everything is perspective. For instance:
- Behind every stock is a company. Find out what it's doing. Check.
- Time is on your side when you own shares of superior companies. Got it.
- Know what you own, and know why you own it. Yes, sir.
That's timeless advice. Those quotes, along with three others, lay the foundation for my next stock purchases.
Before I share what they are, let me quickly review the types of companies I'm looking for in my Trends and Trades portfolio (follow along on Twitter). I want to own businesses with:
- Tranformational technologies.
- Nascent performance.
- Talented management.
These are the companies that can generate multibagger returns. And I think both of my choices are up to the task.
A 2-for-1 deal
I draw inspiration from two more of Lynch's quotes. One's a classic. The other one is obscure but right on target.
- The best stock to buy may be one you already own.
- When even the analysts are bored, it's time to buy.
Optical-networking hardware maker Infinera (Nasdaq: INFN ) satisfies both of Lynch's quips. The company has asked investors to be patient as the company prepares to roll out its next-generation product. And since there's no action, the stock has been tossed to the "uninterested" piles on sell-side analysts' desks. Just look at the breakdown of their recommendations.
Number of Analysts
Source: S&P Capital IQ.
Yeah, analysts are bored stiff waiting for the catalyst to come in 2012. But Infinera has a differentiated technology compared with incumbents such as Ciena (Nasdaq: CIEN ) and Alcatel-Lucent (NYSE: ALU ) . TNT already owns shares. I still think it's a home-run stock and am willing to wait for the payoff.
I'm adding another 3% to the portfolio.
A bright future
Back to Lynch:
- You can't see the future through a rearview mirror.
Lynch may have said that first, but I give David Gardner credit for encouraging me to dream about the possibilities companies can have. That's why I'm excited to invest 5% of the TNT portfolio in InvenSense (Nasdaq: INVN ) . Let's look at this company in terms of what I look for in an investment.
Transformational technology: InvenSense is changing the way we interact with electronic devices. The company designs and builds micro-electro-mechanical systems (MEMS), namely accelerometers, gyroscopes, compasses, and pressure sensors. It all started with the Wii: InvenSense's MEMS are in the system's handheld, motion-sensitive controllers that gave users a fuller gaming experience. And InvenSense wants to take the resulting desire to be more closely connected with devices and have it spread like wildfire.
Nascent performance: At the same time, Wii controllers are quickly moving into the rearview mirror. But InvenSense is already on to the next big opportunity: smartphones and tablets. According to IHS iSuppi, smartphones and tablets with motion-control technology with increase from 37 million units in 2010 to 512 million units in 2014. STMicroelectronics (NYSE: STM ) will continue to put similar chips in Apple's (Nasdaq: AAPL ) iPhones and iPads, leaving InvenSense to continue to supply sensors to many of the other big players, including Samsung, HTC, and Research In Motion (Nasdaq: RIMM ) , which made up 40.8% of the shipments in 3Q 2011. InvenSense serves those customers, as well as LG Electronics.
InvenSense generated almost $130 million of revenue and nearly $23 million of free cash flow over the 12-month period ended October 2011. And the smartphone and tablet markets haven't even really taken off yet. There are also plenty of other opportunities for the company to explore: smart TVs, toys, navigation devices, cameras, and industrial tools, to name a few. Given the huge opportunity ahead of it, I think InvenSense could be three to five times as large in five years, delivering incredible performance to shareholders.
Talented management: Steven Nasiri has been and remains a critical part of the company's success. Nasiri founded InvenSense and developed the Nasiri-Fabrication platform, which puts motion sensors on microprocessors in a cost-effective manner. InvenSense made the most of the Wii opportunity, but its MotionApps ecosystem may be more important, as it opened the door to the smartphone and tablet market. MotionApps gives developers access to the sensors to create new applications. More applications should lead to higher adoption rates and more growth in the future. And with a 12% stake in the company, Nasiri has interests that are clearly aligned with shareholders.
2 today, more tomorrow
I believe investors need to kick the door down when opportunity knocks. That's why I'm adding to my Infinera position as well as bringing InvenSense into the fold. These companies not only have home-run potential but are also businesses I want to be a part of over time.
The Trends and Trades portfolio is just getting started. There's still plenty of cash left to go after these additional attractive opportunities. I have a number of them in mind and am writing about them all the time. You don't want to miss any of the action. The best way to stay up to date is to click the @trendsandtrades link to follow me on Twitter.