It's often said that we should "invest in what we know." Understanding how a business works is absolutely important, which leads many investors to ownership of companies they use or interact with on a regular basis. However, sometimes the best investments are boring, under-the-radar companies that don't do anything all that exciting but are nonetheless absolutely crucial to keeping the world moving.
Fortinet (FTNT 1.00%), Ubiquiti (UI 2.58%), and Zebra Technologies (ZBRA 0.35%) are those kinds of companies. Here's why three Fool.com contributors think they're a buy right now.
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The world needs data centers more than ever
Nicholas Rossolillo (Fortinet): Everyone knows how important cybersecurity is, but most cybersecurity stocks are far from household names. Even among the few growth investor darlings (like CrowdStrike Holdings (CRWD -0.68%), for example), Fortinet is often overlooked. It's categorized as a "legacy" security company, one that predates this era of cloud computing and isn't growing as fast as its cloud-security peers.
That's a real shame, though, because Fortinet's products and services are more important than ever. The pandemic has accelerated the use of cloud-computing services, with data centers functioning as the basic computing units of the cloud. Keeping data centers and networks that connect to them safe and secure is an absolute necessity.
Fortinet just so happens to make some of the best security hardware around, specializing in the design of firewalls (a device that monitors and controls traffic passing through a network) and the chips that power them. Fortinet has been mastering its craft for decades and has built a sizable subscription-services business atop this security-hardware business.
The proof this is no legacy security outfit is in the numbers. Fortinet's revenue and free cash flow grew a respective 630% and 780% over the last 10-year stretch, including 29% revenue growth and 32% free cash flow growth in 2021. Management is forecasting at least another 28% increase in sales in 2022.
It's no wonder Fortinet stock has come out of the recent high-growth, tech-stock sell-off relatively unscathed and is still sitting on just over a 100% return in the last year. Given the company's enduring momentum, this remains my personal favorite among cybersecurity stocks.
It's time to take a ride on that Zebra
Anders Bylund (Zebra Technologies): Barcode-scanning giant and information-management expert Zebra Technologies reported fourth-quarter results on Thursday. The company edged out analyst estimates across the board, issued full-year guidance in line with analyst projections, and boosted its long-term targets for annual sales growth from 4.5% to 6%. Zebra achieved all of this amid a global supply chain meltdown that forced the company to pay a steep premium for expedited freight.
And Zebra's stock fell more than 12% over the next two days. Go figure.
The Zebra bears focused on a modest slate of guidance figures for the first quarter, settling for 2% year-over-year revenue growth as the supply of electronic components grows even tighter. They are also ignoring the fact that Zebra is tackling the shortages. The company has redesigned some of its most popular barcode-scanning tools to use commonly available parts instead of more advanced chips with longer lead times. Zebra has also negotiated firm supply commitments for its most important components.
Production expenses will rise a bit as a result, but Zebra is raising its prices on a case-by-case basis at the end of February. And don't forget that the company is sitting on a substantial backlog of unfilled orders, which should flow through the business process and income statement in short order once the supply chain problems have been addressed.
So Zebra's stock is back to prices last seen a full year ago, trading at just 20 times forward earnings estimates. This buy-in window looks downright tempting to me as the short-term challenges are sure to subside while the long-term growth story continues.
The most profitable company you've never heard of is an under-the-radar special situation
Billy Duberstein (Ubiquiti Inc.): For a $15 billion company, it's harder to get more under-the-radar than Ubiquiti, Inc. After all, the company only releases the barest amount of information required of a public company and doesn't hold conference calls. Ubiquiti can afford to do so of course because its founder and CEO Robert Pera owns a whopping 91.5% of shares outstanding! That's the result of Pera taking little venture capital money and making aggressive share repurchases over Ubiquiti's life as a public company.
Ubiquiti is a unique company that sells enterprise-grade Wi-Fi equipment, security cameras, and smart home/office equipment for service providers and enterprises all over the world. But Ubiquiti takes a unique approach: Pera hires a small group of all-star engineers, makes high-quality products but sells them at a low price point, often 50% or less than the cost of high-touch enterprise solutions delivered by companies such as Cisco (NASDAQ: CSCO).
Ubiquiti is still able to generate high profit margins because it doesn't have a high-touch sales and marketing team. Rather, Ubiquiti has cultivated its own online community of "pro-sumers" who often help themselves with customer service issues. For difficult problems, customers can even interface with Ubiquiti engineers directly. And it leans on its low prices and viral word-of-mouth to generate sales. This low-touch, high-volume business model allows Ubiquiti to generate high operating margins, often in the 30% range, and an extremely high return on invested capital.
However, Ubiquiti has sold off recently after a lackluster earnings report, which showed both sequential and year-over-year declines in revenue, while gross margins fell a whopping five percentage points. From the limited commentary, management indicated that the lackluster results came from materials shortages which made it unable to fulfill demand, as well as higher costs for shipping. That's certainly likely and along the lines of what we have heard from other tech companies. However, I'm betting Pera decided not to raise prices to customers and rather ate the higher shipping and component costs. That fits with his "outsider" mentality and the fact he doesn't have to answer to public shareholders.
So why invest today? Well, Ubiquiti still trades at around 28 times earnings, around $245 per share. Yet that's materially down from all-time highs of around $400 per share hit in March of 2021. Yet based on the pace and level of recent share repurchases, it appears that Ubiquiti will buy back stock anytime the share price falls below $300. It certainly seems that Pera will repurchase shares until he owns all of the company, and he may take it private in short order. At this share price, Ubiquiti would be able to repurchase all the remaining shares in about 18 months to two years' time, based on current earnings.
So, Ubiquiti could be a special situation based on what Pera decides he wants to do -- and at what price. Savvy shareholders may benefit handsomely.
