The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Silicon Laboratories
Austin
, Texas
$29.36
52-week low-high: $26.88-$59.45
$1.60 billion market cap
By Marko Djuranovic
It's generally a bad idea to buy stocks because you don't think the price can drop much further. Or because, ahem, now that the high-profile CEO was finally fired things are bound to get better. Undoubtedly, the universe takes it upon itself to prove you wrong by slapping the stock you just bought down another 15%.
The flip side of the coin is that if you find a way to pick the true turnarounds, you'll make a lot of money -- investing lore about Lynch and Buffett is filled with such stories of multibagger successes.
Could maker of chips for mobile handsets Silicon Labs be one such story? Tom Gardner thought so several times in the Motley Fool Stock Advisor newsletter, and I'm inclined to agree. Here are few reasons why.
Cash on hand. When times are tough and sales growth slows (or even reverses), not having creditors knocking on the door can mean the difference between survival and bankruptcy. Silicon Laboratories not only carries negligible debt but also sits on $275 million in cash and short-term investments.
Rising profit margin. Over the past few years, net profit margins have risen from 11% to 17%, mostly on reduced SG&A expenses. This is a sign of a business that's not only utilizing its scale advantage but also getting leaner in the process.
Valuation. For an industry that's been beaten down hard in the past year (few years, actually) and where analysts predict single-digit growth in 2005, a forward P/E of 22 still seems high. It is. And if that were the whole story, I'd concede the game right now. But note that five-year growth estimates sit in the 25-30% range, in large part because of the company's favorable position in regards to the rising appetite for VoIP and PDAs. Put in the proper context, Silicon Labs' valuation is quite reasonable.
Fool contributor Marko Djuranovic does not own shares in any company mentioned in this article.
Home Depot
Atlanta
, Ga.
$37.99
52-week low-high: $32.34-$44.30
$88 billion market cap
By Jeff Hwang
Silicon Labs? I think Marko drew the short end of the stick on this one, because the case for my horse in this race -- Home Depot -- is easy. Even the biggest gambler can appreciate the ease-of-mind in owning the second-largest retailer in the world -- a reliable, well-managed firm that generates $3 billion in annual free cash flow, pays a dividend, buys back shares, and is available at a moderate price.
Plus Home Depot is much more accessible to the average investor, since you don't have to be tech super-savvy to get it. I mean, when was the last time you shopped at Home Depot? Need some wood? A slab of concrete? Nuts, bolts, and tools?
What about an RF synthesizer, ISOmodem, or MCU? Or for an even better question, what are these things?
You get the point. Despite the company's size, Home Depot's still got some growth left in its motor, since the company continues to grow revenues from its services businesses while extending its footprint in both Canada and Mexico. The company expects earnings to climb 10% to 14% in 2005, with sales increasing 9% to 12%. And at under 16 times 2005 earnings, Home Depot's stock is hardly excessively priced.
If you have a solid understanding of Silicon Labs, the company's appeal and its competitive advantages, then go for it. But if it's excitement you're looking for, you're not limited to Silicon Labs -- there are 9,000 other places to look for that, including more accessible tech plays such as Google
Fool contributor Jeff Hwang owns shares of eBay.
Rebuttal
If you are looking for 10% yearly gains, grab an index fund -- same performance, less risk. As for the tech angle, early investors in Microsoft
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