Many of you have read our past coverage of this teaser ad, but I got a recent version of it that hinted that “an obscure $3 tech stock just crushed earnings” … and that “earnings beat estimates on booming 5G demand” and it’s expected to “blast off before November 1″… which makes it sound like an exciting new idea. So I thought I’d update my article a bit, check into the company a little more, and get the discussion going again about this “single stock retirement plan” stock being teased by Alexander Green.
The ad is for membership in The Oxford Club, which is basically an entry-level basic investment newsletter (the letter is called The Communique, price pitched is $99/yr this time). The ad itself is also still dated May, 2018, so most of Green’s promise hasn’t changed, it’s just that different email lead-ins to the ad in recent months have supplied more urgent and timely hints.
So here’s our coverage of that teaser ad, soon to provide you with those answers you seek, and, at the end, I go into the details much more and update my thinking… here’s the part of the ad that caught most peoples’ attention:
“I’m going to show you how a modest investment in a single $3 stock could generate a multimillion-dollar dream retirement in the coming years.
“I call it the ‘Single-Stock Retirement Plan.’
“Some might find the idea of retiring on one stock outlandish, yet many thousands of Americans have already done it.
“In fact, as you’re about to see, the 20 wealthiest men and women in America today made their fortunes thanks largely to a single stock.”
And he says that if you’re going to retire on one stock like those wealthy men and women did (though they mostly built businesses, they didn’t invest passively in one stock), Green says it has to be “the perfect stock.”
He’s even got a checklist for what “perfect” looks like when you’re seeking this “dream stock” for a one-stock retirement… which is when the clues start to drop in about what stock he’s pitching:
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“products used by billions of customers…
“profit margins protected [patents, trademarks, etc.]…
“hundreds of billions of dollars in future sales and profits… contractually guaranteed…
“pay an enormous dividend.”
And he says this “perfect” stock should have catalysts — upcoming announcements that could drive the share price — and that the “one key element” is that the stock must be “undiscovered.” And that it should “trade for a just a few dollars a share.”
The per share business is silly, of course, but investors do get hung up on the idea of paying a low per-share price as a prerequisite for huge future gains. Different countries and different eras have different expectations for “per share” pricing — some large Australian companies trade at what we would think of in the US as “penny stock” prices, for example, and it used to be that most large US companies would aggressively manage their share price, using stock splits, to keep it in the $40-100 range. The market cap and the valuation of the company are what matters most, the price per share is mostly irrelevant.
But anwyay, that’s all a lead-up to this stock that Alexander Green is teasing… what other clues do we get? From the ad:
“I only recently uncovered it.
“And if you move quickly – before an upcoming announcement set for August 20 – this $3 stock could hand you the kind of carefree retirement most people only dream about.”
And then some specifics…
“The company has inked deals with Cisco, Microsoft, Intel, Sharp, IBM, Hewlett Packard, Nintendo, Sony, Nokia and Apple…
“In total, I expect it to receive more than $34.5 BILLION from these partnerships alone….
“According to data from Intellectual Property Watchdog, the firm has quietly amassed one of the largest tech patent libraries of any company in the world.
“It has 29,187 patents inside the United States and 49,599 registered globally.
“You can see why the world’s most famed tech companies are all signing blockbuster deals with this little-known firm trading for $3.”
And it sounds like this is not a small company, despite that $3 share price…
“… earnings per share recently surged 106%.
“And I expect the company to hit $164 billion in annual sales as early as 2019.
“The company pays a big dividend too… 116% bigger than the S&P 500 average.”
Why is this stock “unknown?” Green says it “does not trade in a normal way” and it’s not on a US exchange… and, far more mysteriously, that it “literally trades under a secret name.”
So that’s enough to get our answer, I bet, but let’s throw a couple other clues into the Thinkolator…
“A major multibillion-dollar deal that involves both Apple and Donald Trump is about to bring this secret company into the mainstream….
“… the $3 stock I’m talking about had very humble beginnings.
“It was started by the blue-collar son of a career police officer….
“… he scrounged together $7,500 in seed money and went to work.
“He founded a tech company, but a very different kind…
“He realized that he probably couldn’t compete directly with the Apple, Amazon, Samsung and Google of the world.
“But if he could quietly do business with these tech giants, he just might turn his own venture into a successful company.”
He started out building computer hardware — the chassis for a desktop computer, and then aggressively expanded to build and provide components for all kinds of tech products. Green cites a few recent contract examples”
“The company has signed an agreement to build eight different motherboards for Intel.
“It’s also building five more for the $5 billion semiconductor company Advanced Micro Devices.
“It’s building LCD screens for Sharp in an $8.8 billion production plan.”
And a dozen others, components for Amazon and Nokia and Acer and Nintendo and Apple. So who is it?
This is, as several readers have already figured out, the Taiwanese company Foxconn, known for playing a major role in assembling Apple’s iPhones but also a big supplier to most of the world’s gadget makers. Foxconn is the world’s largest contract manufacturer and one of the largest private employers in China (if not the largest), and is one of the largest tech companies in the world (at least on a revenue basis).
And the “secret name?” Foxconn is the more widely-known name of the company, adopted when they were trying to get more international sales around 1980, and its the name you’ll see most articles use (as when they discuss the massive “Foxconn City” in Shenzhen, which has more than 200,000 workers), but the actual name under which it was founded (in 1974) is Hon Hai Precision Industry, and it’s still listed under that name in Taiwan. You can see the company’s own description of itself on their website here.
So yes, I suppose it’s kinda “secret” that Foxconn, the contract manufacturer that most tech investors have heard of, is actually Hon Hai — though certainly all of the institutional investors who own the lion’s share of this large cap stock are obviously aware.
And yes, it’s technically a $3ish stock, though that requires some currency translation — it trades in Taiwan at ticker 2317, and closed yesterday at T$74.60, which in US$ would be $2.40 (that’s down about 10% from when we first covered this teaser, in mid-July of 2018).
It’s not particularly difficult to trade the stock in the US, should you be so inclined — there is an ADR representing the Taiwanese shares for US investors, it trades OTC at HNHPF (sometimes flips to HNHPD briefly when they do odd stock splits, like last fall), with each US OTC share equaling two shares in Taiwan. There are similar depository receipts trading in London at HHPD, also representing two Taiwanese shares each. The overwhelming majority of trading volume is in Taiwan, as you might imagine, so that’s where the “fair” price is set, but the London and NY trading tends to be very close to that price most of the time despite the lower volume.
So if you want to buy in the US, technically you’re paying $4.80 or so per ADR… but each ADR is really backed by two shares in Taiwan, so I suppose you can say it’s “secretly” a $3(ish) stock.
All that mystery and intrigue is beside the point, though — the question is, do you want to own a piece of this gigantic electronics manufacturing company? Here’s what I can tell you about it:
It’s a big company, the market cap is now about $34 billion (it was close to $50 billion when the ad started)… so it’s not likely to rise 1,000% over the next decade, and it’s not a small cap rising star just because the share price is fairly low. Hon Hai is the second largest stock in Taiwan, trailing only the massive Taiwan Semiconductor (TSM).
Hon Hai/Foxconn is priced at a steep discount to the broader market, and has underperformed the broader market, for a long time. The shares trade at about 10X trailing earnings and are now at a discount to book value, with a price/sales of only 0.2, and the dividend is very high — likely to be near 5% over the next year, though the payout varies pretty widely.
That hasn’t helped the stock much, I’m afraid, it was cheap when Green first pitched it (1.3X book then, similar PE ratio and dividend), it’s been in a pretty steep decline since the highs of 2017 and has not been able to generate any meaningful share price growth for a long time. Even if you bought at the very bottom of the market (for Hon Hai, at least) in November of 2008, you would have gains of only about 85% over those 11 years, including dividends… far short of the 400% return of the S&P 500 over that time. And almost 2,100% for Apple, Foxconn’s most important customer. Here’s what that looks like, for the visual learners among you:
Which does serve, at least, as a helpful start to a thought exercise about who profits from hit products — is it the designers, the developers, or the companies who sell them parts and assemble the actual gadgets? Lots of things go into that, and there are plenty of growing and profitable component makers, and Foxconn has certainly made a profit most of the time over the years, but the two things that seem to me have the most impact on compounding long-term growth in the sector are sustainable brands and some measure of uniqueness. Suppliers can do very well when their product or chip or whatever is better than the competition, but they also have to keep that edge… or make the component an in-demand brand or a near monopoly, as Intel did 30 years ago with their “Intel Inside” branding campaigns for chips and their tight partnership with Microsoft, and Qualcomm did with their near-monopoly on wireless communication chips for a while.
That’s what I’d look for when researching Foxconn… where do they have the opportunity to become more than an anonymous assembler? What’s keeping them from having to compete on price? If the shares are down just because of the burgeoning trade war fears, which could obviously have an impact on one of China’s largest exporters, then perhaps this lower price is a buying opportunity — but Foxconn shareholders have failed to really benefit from sales growth or new businesses or booming iPhone sales for a long time, trade war or no trade war, so I think there are some structural problems behind their relatively weak performance.
The stock does also carry some political and regulatory risk, or at least “headline risk” because of the frequent complaints and lawsuits about worker treatment at its many gigantic factories around the world. We all remember the stories about suicides by Apple iPhone workers, I bet, and those were Foxconn stories about the pressure, secrecy, long working hours and employee stress in Shenzhen, but similar smaller-scale stories seem to pop up with some frequency. The latest “Trump” deal touted in the ad, the plan to build a big Foxconn manufacturing plant in Wisconsin, seems to have fizzled to either “nothing” or “we’ll build a much smaller R&D center.”
Foxconn is considered to be just an “iPhone maker” by most investors, so the share price tends to react to the iPhone cycle as massive predictions of huge sales volume send the stock climbing and slower sales, like we’ve seen recently, help to pressure the stock… the company is obviously more than “just” Apple’s main manufacturing partner, though that is also by far their most important partner, and I don’t know if their performance will be separated from “reacting to iPhone volumes” anytime soon.
They’ve been aggressively expanding into new businesses and buying up brands and technologies for a long time, most recently with their acquisition of Belkin last year… and yet adding more second-tier brands and low-margin businesses in very competitive sectors doesn’t necessarily give them better profitability. My impression is that the pressure of the low-margin contract manufacturing business, where companies like Apple push them to get costs lower and lower each year, seems to have kept them from showing any real sustainable earnings growth on the back of the growth in the business… so if Alexander Green ends up being right about this being a “one stock retirement” idea, it will likely be because Foxconn starts to get a little more leverage over the actual brands whose products they make, giving them a chance to increase margins… or because they finally move up the “value added” chain a bit, as they’ve been trying to do recently with their push into the automotive business. I’m not holding my breath.
How about that recent updated pitch that this is “an obscure $3 tech stock” that “just crushed earnings?”
They did top estimates when they reported earnings on August 13, mostly because their Huawei business (assembling Huawei phones, etc.) did not suffer as much as expected. They had record revenues in the quarter, but the net income line, while better than expected, was about 2.5% below where it was a year ago. That’s long been the challenge for Foxconn/Hon Hai for shareholders: They can book a ton of business, even with global declines in smartphone sales volumes, but they haven’t ever made much of a profit on all that business. It seems, in fact, that to a large degree they are in business to grow the business on the top line and to help their partners become more efficient, not to maximize profits for themselves.
The ads also cite that “earnings beat estimates on booming 5G demand.”
That quote did come from published reports this year, though that was said about the earnings six months ago, not the most recent report. The story from the Nikkei Asian Review was indeed headlined “Foxconn earnings beat market estimates on booming 5G demand” … and like this most recent quarter the basic story was that the results beat expectations… but were still worse than last year, with profits falling 7% despite revenue growing by 12%).
And yes, Foxconn did top that $164 billion revenue mark that was estimated for 2019… they have already hit $175 billion for the trailing four quarters, so yes, the company is now set to bring in more revenue than IBM, Facebook and even Google.
But in the end, that’s not a particularly interesting comparison. Sure, Foxconn brings in a lot more revenue than most companies — in fact, it’s among the 50 largest companies in the world when you measure by sales.
And Foxconn’s revenue is even growing a bit, though not near as fast as Alphabet or Facebook — Alphabet, in fact, has almost caught up with Foxconn on the revenue front ($148 billion in revenue over the past four quarters, versus $175 billion for Foxconn).
You could use different comparators if you wish, as well — Foxconn sales are well below those of Walmart (the largest in the world, over $500 billion), Apple, Berkshire Hathaway, Toyota, ExxonMobil, CVS, Amazon… there are quite a few biggies out there.
There are many ways to think about and value companies, but going by a simple metric like “their revenues are huge” is not usually going to tell you everything you need to know to sensibly evaluate a company. The health of a company can be measured in many ways, but just to illustrate the varying valuations we see among large firms I pulled down some data from YCharts on the 30 companies with the highest revenue that trade in the US, either with a direct listing or over the counter. I included their revenue for the past year, their profit margin, the growth in revenue over the past year, and two valuation metrics — price/sales and price/earnings. Then from that list of 30, I sorted them out and highlighted them in green if they were in the “top ten” among this group… so if their PE ratio was among the ten lowest in this list, for example, that’s highlighted.
You’ll see that every company has tradeoffs — nobody is big, cheap, super-profitable and fast-growing, and usually if they are more than one of those things (big and cheap, or cheap and fast-growing), then there’s a caveat in the “story” of that stock… like Mitsubishi, which had a one-time surge in revenue but probably won’t grow like that again, or ExxonMobil or Chevron, which are growing fast with high margins but are punished because people fear an oil glut (or did, until this week).
How does Hon Hai/Foxconn come in on this list? As very cheap on both earnings and sales… with growth that comes in a little lower than some of those biggies, but better than others, and a tiny profit margin, among the lowest in the group.
So yes, Hon Hai is the largest contract manufacturer in the world, and they’re very good at what they do… but their performance, and the fact that the stock has almost always been very cheap on those earnings and sales valuations, also indicates that there are also limits to the value of “scale” — or, perhaps, that shareholder returns are not a primary goal for Hon Hai. The whole sector is very low-margin, of course, not just FoxConn — the smaller Pegatron (4938 in Taiway, PGTRF OTC in the US), for example, is also cheap with a PE ratio of about 11, price to sales of less than 0.1, and a higher dividend (6.75%)
Much of what is going on now is a game of trying to figure out what will happen with China and with iPhone sales… Hon Hai is arguably depressed partly because of the trade dispute, but more clearly because its biggest customer, Apple, is seeing slackening of demand for new iPhones. Having Apple raise prices on iPhones as they’ve been doing helps Apple keep revenues relatively high, but it doesn’t help Foxconn — they’re getting paid to assemble the phones, and what matters most to them is the volume of phones sold, not the revenue that Apple books for those phones. (The recent iPhones were priced below what a lot of analysts expected, which might help volume, but apparently the pre-orders of the new iPhones have not been overwhelming as of yet.)
So even if you think the trade war will come out in the wash after all the posturing is done, which is a big assumption but certainly possible, most of the hope for Foxconn and the other Apple partners and suppliers is resting on 2020, when everyone expects that Apple will release it’s first new iPhone with 5G capability and, hopefully, spur a new wave of upgrade demand for the first time in a couple years.
Is greatness coming? I remain pretty unimpressed with Foxconn, partly because its entwined in both US/China and Taiwan/China disputes, and company watchers worried about founder Terry Gou becoming much more politically active and taking leave of the company in order to maybe make an independent run for President of Taiwan after losing the Kuomintang primary, though he announced just today that he was pulling out of that race (which is arguably good for Foxconn — think of the “brand risk” that investors worried about with Starbucks’ Howard Schulz running for president, for some comparison), but I’ve mostly been unimpressed because it has been huge and theoretically dominant for many years… and is still apparently a “price taker,” not a “price maker.” Having $175 billion in revenue and an arguably dominant position as the biggest contract manufacturer in the world apparently doesn’t mean all that much if Apple, for whom you effectively act as an (almost unprofitable) manufacturing subsidiary, has you over a barrel.
Yes, Foxconn has built up amazing capabilities… yes, they have a ton of patents… but guessing at when they will be able to extract more value from the electronics manufacturing supply chain instead of having to support the margins of Huawei, Apple and their many, many other customers has so far been disappointing for investors… I’d be more tempted, frankly, by their fellow Taiwanese mega-cap Taiwan Semiconductor (TWM), which is the world’s biggest contract fabricator for all those fabless chip companies — they’re not growing earnings either right now, partly due to the trade war and phone sale cycles, and the stock has also disappointed for decades and is more richly valued than Foxconn at the moment, but they are far more profitable and I expect they’ll have much more pricing power than Foxconn, and could grow nicely with chip demand in this next wave of technological advancement (5G, AI, etc.). Not that I’m buying TSM, either, I just think it looks more attractive than Foxconn.
My guess is that Hon Hai/Foxconn’s disappointment will probably continue, and that Foxconn stock will underperform the market (and the shares of Foxconn’s major customers) over the next ten years, but clearly Alexander Green disagrees.
It’s your money, though, so it’s what you think that matters — ready for a big, cheap and historically disappointing stock? Are better days ahead for Foxconn? Let us know with a comment below.
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Disclosures: Among the companies mentioned above, I own call options and/or shares of Apple, Amazon, Alphabet, Nokia, Hewlett Packard, Facebook, Berkshire Hathaway and Starbucks in my Real Money Portfolio. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.