Are These Electronics Stocks Shorted Out?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The world of small-cap electronics stocks is a violent one. Being cyclical and prone to revolutions every few years, Moore's Law isn't the only thing every manufacturer has to be leery of. But the volatility that gives you the risk of these small stocks blowing up in your face also gives them the kind of fuel that occasionally builds 10-baggers.

Nam Tai Electronics (NYSE: NTE) manufactures and designs for original equipment manufacturers (OEMs) for consumer goods. But what makes Nam Tai special? For one thing, consistent financials. Nam Tai's been rocking solid free cash flow over most of the past decade. Through the Great Recession, Nam Tai held together reasonably well despite its small size and relative obscurity. I also like how the company is trading for only 1.7 times its book value and around 9 times its trailing earnings.

However, I have to caution you against getting too excited. Nam Tai has traditionally paid reasonable dividends, often in the 10% range. Right now that dividend is 4.3%, which is only special in a company with a $600 million market cap that pulls 5.8% profit margins because it isn't particularly stable. While I love getting paid to own a stock, Nam Tai's traction to continue paying a dividend is shaky even on a good day. As the economy recovers I'm sure it will do fine, but you can do better.

Encore Wire (NASDAQ: WIRE) is all about wire. As construction cooled, the need for cable and wire fell off. It hasn't exactly helped that commodity prices are jacked up. Because of this pressure from both sides, Encore has been squeezed to within inches of its life. For a company with less than a $700 million market cap that only pulls 1.8% profit margins, it's a hard knock life indeed. I'm not even sure why Encore bothers paying a .2% dividend.

Unfortunately, I don't have a lot of great things to say here. Encore is trading at a fairly average 1.6 times book value and a very steep 34 times earnings. So would you rather pay half that much for a company in a less stressed industry, or hope that you'll get back your money in about 15 more years when the next probable housing boom occurs? Encore may be doing a fine job, but it's essentially keeping a bonfire lit during a hurricane -- a possible but miserable task. I'd stay away from Encore for a while.

Acuity Brands (NYSE: AYI) is all about lighting. Turning 5.8% profits on $1.9 billion in 2012 revenue, it's not bad at all at about staying afloat, recession or recovery. At a $2.9 billion market cap, it's almost unfair to put Acuity in the same league as the other two companies I've mentioned. But I need to point out some of the major differences that make Acuity a better potential buy than Encore or Nam Tai.

1. Presence

The other two companies don't even have Wikipedia entries. Putting their names into search engines requires some hunting to find the company home pages. Acuity, on the other hand, is a lot easier to find information on. It's hard to trade well on a public market if the public barely knows you exist.

2. Branding

On top of that, Acuity also has a lot of well-known brands in the lighting industry like Acculamp, Sunoptics, and Peerless. Being known generally means being purchased.

3. Controlled focus

Nobody's saying Encore isn't all about wire. But sometimes it's okay to spread out slightly and expand your business the way Acuity did with specialty chemicals. I rather wish I'd had shares of Acuity back in 2007 when they spun off that chemical business, Zep.

The only issue I have with Acuity Brands is that it's pricey. Brands usually carry something of a surcharge for their perceived safety, but in this case I think it's a bit steep. Trading at 26 times earnings and more than 3 times book value, I want better profit margins (at least in the 10-20% range) and either a larger dividend or a commitment to sturdy growth. If the profits go up or the price goes down, I like Acuity. But for right now, it's just one of three that won't help your portfolio too much.

pongun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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