Momentum’s leading stockbroking division – Momentum Securities – will be bringing you their Stock Pick of the Week, each week on a Wednesday or Thursday. The stock pick motivation is available as written content and a downloadable audio clip.
This week’s pick: Samsung
About: Samsung, is a South Korean company that is one of the world's largest producers of electronic devices. Samsung specializes in the production of a wide variety of consumer and industry electronics, including appliances, digital media devices, semiconductors, memory chips, and integrated systems.
Portfolio Manager for Momentum Securities, Francois Strydom shares his insight on Samsung:
In the last couple of weeks, you might have heard of a strong narrative, playing out to the markets, which is the reflation trade, which basically means the global economy is recovering. Interest rates will start to rise, whether it be in the bond market or through monetary policy. Central banks might not be imminent in the next couple of months, but definitely next, in terms of the viewpoint of next year. And that reflationary trade has brought about a lot of good momentum in resource stocks.
But another sort of resource that people don't always think about is the capacity in the resource for processing power, which is mostly to do with semiconductors. Now that gets onto our stock for the week, which is Samsung. And a lot of people, when they hear the word Samsung Electronics, they think of exactly that, household appliances, particularly cell phones, smartphones, while running the Android operating system. But also Samsung is actually one of the large world's largest semiconductor manufacturers.
If you think of appliances and cell phones, that actually makes up about 50 percent of Samsung's overall revenue. Whereas semiconductor manufacturing makes up easily 25 percent. If you go and look at the geographical areas where Samsung makes up that revenue, it's also quite conveniently in the three major economies or the three economies that we think are also leading the way in the cyclical trade, but also in the recovery in the global space. Those are the US, China and to a lesser extent, South East Asia.
Now, Samsung is one of those strength stocks where if you talk about value in a trade from growth momentum into value, value becomes a relative term. So, if you look at a stock that’s trading on a 21, historical PE (Price to Earning ratio), you wouldn't historically have said that that is a value stock. But given what happened in the economy last year, the absolute halt in terms of production, in terms of supply, historical PE’s aren’t that accurate to look at when it comes to where we are now.
So, from a forward PE perspective, which we think is fairly conservative, Samsung trades at a 14 forward PE relative to a five year average of about a 9 or 10 forward PE, which isn't that expensive. It's a stock that if you want to buy on the London exchange, it's about 1800 to 1850 dollars at the moment, which is deer from where it has been trading even six months ago, but it's a stock that if it's not in the portfolio at the moment, you need to have it at some point. And if you still have it in your portfolio, keep that position at a comfortable three to five percent at least. From an external analyst point of view, there’s about 39 top global analysts covering this share. 90 percent of them have still got a strong buy rating on the stock with the average median analyst saying there’s about a 26 percent upside potential in that stock price as it trades today.
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