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Last week I split my time between vacationing with my family and reviewing earnings reports. The first was easy. The second was far less relaxing.
It seems that shares of companies reporting results above expectations are holding firm, while those that even slightly disappoint are taking it on the chin. That’s always the case to some degree during earnings season, but right now this market is a little more on edge than usual.
Just pull up a chart of Apple (NASDAQ: AAPL) or Twitter (NYSE: TWTR) and you’ll see what I mean.
It’s as important as ever to make sure you’re holding best-of-breed growth stocks right now. And also to zero in (if you haven’t already) on the primary growth catalysts and industry trends that you expect to drive shares of your holdings higher.
Earnings season is a perfect time to do this, since all the information is laid right out there for you. Between the initial earnings press release, the conference call and the filing of the full 10-Q report with the SEC, there is plenty of information available.
You want to be looking for potential catalysts specific to the company in question. These are things like a new factory, manufacturing expansion, new products, new customers, new technologies, and so on. It’s a good idea to try and get at least a rough idea of projected revenue and EPS growth from such initiatives.
Industry growth trends are good to monitor too. Just be sure to understand the connection between the trend and the investment, how long you believe the trend will last for, and what you expect reasonable upside is. And you’ll want to have an idea of how much exposure a company has to that industry.
One growth market that has generated a lot of investor interest lately, and one that we have exposure to in Top Stock Insights, is smart cars and self-driving cars. The investment opportunities here range from companies building things as simple as smart tire valves and back-up mirrors, to more advanced autonomous driving technologies.
One thing is for certain, and that is that cars are becoming much more sophisticated specimens of mobile technology. It’s all about large screens, back-up cameras, blind spot monitoring and a host of applications that until recently were only available on smartphones and tablets.
And it’s also about differentiating cars in an industry that has enjoyed years of growth due to a Great Recession-induced delay in the upgrade cycle.
The recent announcement that Nokia (NYSE: NOK) has sold its HERE mapping service to Audi, BMW and Mercedes for $3 billion is yet another potential signal that growth in the smart car arena still has legs.
This service is reported to power 80% of U.S. and European on-board navigation systems, so acquiring a majority stake in the unit should help these auto companies fend off competing connectivity services from large U.S. tech companies, while also helping to cement access to important technology to help develop autonomous vehicles.
A Mid-Cap Connected Car Play
We’ve held what I consider to be a very interesting mid-cap company in the connected car space, Harman International (NYSE: HAR). You’ve likely heard of this company, or at least its well-known brands, which include Infinity, JBL, Lexicon, AKG, Harman Kardon and Mark Levinson.
The stock has been a little up and down in 2015, but for the most part Harman is doing the right things. The company has become the key player to connect new technology developers and auto manufacturers. As its CEO says, Harman is the bridge between Silicon Valley and the automakers.
A major strategic switch from a previous life as a hardware-focused company to its current status as a software-focused company has opened up vast opportunities to introduce new products.
Harman has exposure beyond the auto industry too. It also supplies consumer and enterprise markets with connected technologies. It actually has three major divisions.
The car and home audio business is called its Lifestyle business. In the last quarter, sales in the Lifestyle division grew by 13%, or 21% excluding the impact of foreign exchange translation (FX).
It also has an integrated entertainment, navigation and communication segment of its business, which it calls Infotainment. Harman grew revenues in this segment by 7% (21% excluding FX) in the last quarter.
One of the division’s growth catalysts has been Harman’s ability to add informational features to the listening experience. Access to maps, social media, restaurant reviews, security and safety services and video entertainment are just a few additional features that customers are coming to expect while in their cars.
Music goes beyond the home and car of course. We all love a good concert, sporting event and yes, occasionally some sweet elevator music. Harman has investors covered here too with its Professional division. This includes lighting and sound for major music and sporting events, such as the Grammy Awards, Super Bowl halftime show and NBA All-Star Game concert.
The Professional division is the smallest division, but sales growth is robust, coming in at 15% in the last quarter (20% excluding FX), in part due to the acquisition of AMX.
All in, in the just-reported quarter the company delivered sales growth of 16.7% to $1.68 billion, even factoring in foreign exchange translations. On a constant currency basis sales would have been up 28%.
That result beat expectations by $120 million, and drove EPS up 9.6% to $1.37 ($0.05 ahead of expectations). It also drove shares over 6% higher and reversed a downtrend that began in late April.
Harman is a play on the connected car, as well as connected technologies for the home. Industry growth trends in both automotive and home markets supports the stock’s bright future. And if it can hold on to its post-earnings gains I wouldn’t be surprised to see the old high of around $146 broken before year-end.
It is just one of our exciting smart car and autonomous driving-related positions in Top Stock Insights. For more ideas on how to play the trend, click here.