3 Reasons Garmin's Stock Could Rise

Garmin shares have outperformed the S&P 500 in 2014. Why the stock could continue to rally.

Sep 5, 2014 at 12:45PM

Shares of GPS-maker Garmin (NASDAQ:GRMN) have had a solid year thus far -- although Garmin's share price is down noticeably from its early July high, Garmin shares, on a total return basis, have outperformed the broader S&P 500 in 2014.

GRMN Total Return Price Chart

Will Garmin continue to reward shareholders? Below are three reasons why Garmin shares could rally. It should be noted, however, that even if all three scenarios play out, there's no guarantee that Garmin shares will rise. A general market downturn, unforeseen misfortune, or pure random chance could weigh on the stock. Nevertheless, investors should welcome the following possibilities.

1. It keeps its GPS business relevant
Garmin's business remains dependent on the sale of its automotive and personal GPS units. Last quarter, sales of these devices generated nearly 45% of Garmin's net sales, 38% of its gross profit, and 34% of its operating income.

This appears to be a problem for Garmin, at least in theory, as that business seems challenged. Even Garmin's management freely admits that it's under pressure, noting that it "remain[s] cautious" on that particular market. The proliferation of GPS-equipped smartphones could eventually undermine the demand for Garmin's automotive products, particularly with new initiatives like CarPlay and Android Auto bringing an unprecedented level of in-car connectivity.

Or maybe not.

Garmin's management admits that it's primarily focused on profitability rather than growth with that business segment. However, Garmin has released some new products in the last year that could keep its GPS business relevant -- its HUD navigation system, for example, projects turn-by-turn directions in a holographic fashion (a feature no smartphone can match).

At the same time, the market for new cars -- particularly in the US -- remains strong. With the average American vehicle more than 11 years old, car sales should remain high for the foreseeable future. New car buyers could opt for models equipped with Garmin's navigation systems, as the company has deals with several major automotive firms, including Chrysler and Volkswagen.

Garmin's management expects this business to steadily decline, a forecast which is likely reflected in the current stock price. But if Garmin can keep its GPS business relevant in some capacity, shares could appreciate.

2. It capitalizes on the wearable revolution
While automotive and personal GPS units make up the bulk of Garmin's business currently, one of its other segments has emerged as a growth engine: Garmin appears poised to capitalize on the ongoing interest in, and emergence of, wearable computing devices.

Garmin's fitness category, which includes a range of wrist-worn health trackers, saw sales growth of 79% (on an annual basis) last quarter. In total, Garmin's fitness products generated almost 20% of its sales, 22% of its gross profit, and 29% of its operating income in the second quarter -- all up noticeably from the prior year.

Garmin's Forerunner-branded watches are aimed at fitness enthusiasts and include heart rate monitors, GPS, and other features that help owners meet their fitness goals. Unlike other smartwatches that have begun to hit the market, Garmin's products are largely stand-alone devices focused solely on fitness. This allows them to excel other areas -- its recently released Vivofit, for example, offers an unprecedented one-year battery life.

In time, Garmin's wearables could emerge as the company's primary business, overshadowing its declining segments in the process. If Garmin comes to be seen as a bet on the future of wearables, rather than a decling GPS firm, shares could appreciate as Garmin's multiple expands. 

3. Short sellers become buyers
Last, and perhaps most significant, would be a potential short squeeze. In recent months, Garmin has been one of the most heavily shorted stocks in the S&P 500 -- currently, Garmin has a short interest near 15%.

These short sellers could turn into buyers if Garmin shares continue to outperform the broader market. Although any positive news could propel shares of Garmin to the upside, the potential move higher could be magnified by short sellers looking to limit their losses. Garmin pays a solid dividend -- the stock currently yields around 3.5% -- which short sellers are on the hook for every quarter. If Garmin's business remains resilient, investors who have bet against the stock could close their positions, sending Garmin shares higher in the process.

Executing in the face of challenges
Ultimately, Garmin could best reward shareholders by proving its critics wrong. Its core GPS business seems challenged, but its burgeoning wearable segment appears promising, posting impressive growth in recent quarters. if Garmin can defy the short sellers and continue to return capital to shareholders, the stock is likely to continue its recent strong performance.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers