This article is part of our Rising Star Portfolios series.
My timing couldn't have been better, if you, like me, have a sense for the ironic.
On March 9, I published the original buy article for electronic component manufacturer Nam Tai Electronics
It's not the first time my timing has been perfectly synchronized with disaster. I bought the second of three positions in BP just one week before the Deepwater Horizon rig explosion and subsequent oil spill happened last April. Those shares, just like Nam Tai's have done, promptly fell off a cliff. BP's shares fell because of its involvement in one of the larger man-made disasters in recent history and the potential for liability. Nam Tai's shares have fallen because of supply chain concerns for high-tech companies with ties to Japan.
Here's the meme
A lot of electronics parts are made in Japan and the ability to continue manufacturing in the near-term is uncertain. Texas Instruments
Now that's true as far as it goes. What this does for us it help create an opportunity -- a Messed-Up Expectation.
My expectation for Nam Tai
Nam Tai is not tied exclusively to Japan for its supplies. While it specifically calls out China and Japan as sources for its supplies in its latest annual report, it also gets parts from Taiwan and South Korea. It says a few of its supplies are from a single source, but for its major components, it lists several different sources. At this point, I don't expect it to have significant problems in changing sources. The risk is probably higher costs due to higher demand at other suppliers as I expect many companies to do the same shuffling.
I expect this to be a relatively short-term problem, especially considering that I'm expecting to hold the shares for more than just the next quarter or two, unlike many on Wall Street.
Since Nam Tai is debt-free, unlike its competitors Flextronics International
Responding to the market's expectation
At last night's closing price, the market is pricing less than 1% per year growth in free cash flow for the next 10 years and no further growth after that (discounting at my 15% hurdle rate). I know there are some worries about the effects from Japan, but c'mon. It won't ever be able to work around them? Really? If we assume that it can work through any problems and let the company grow at 12.5% per year for five years -- what the one analyst following it has predicted -- half that for the next five, and 2.5% afterward, and, as I wrote before, you'd expect shares to be over $12. What was a potentially 60% upside three weeks ago is now over 90%.
Therefore, the Messed-Up Expectations portfolio will purchase another $360 worth of shares tomorrow. That will be the maximum, however, as the risks called out in the original buy article still exist.
Oh, getting back to BP. I purchased the final set of shares last summer, missing the price bottom by a single day. As BP's shares have risen to their current level, that one purchase has pulled the entire position into the black. I wouldn't be surprised to see similar results with Nam Tai.