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JBL: The Sweet Spot

John Layfield

Two years ago I was in the Sunni Triangle in Iraq doing a USO performance for our troops, whom I love to support, and the incoming mortar signal went off. All the soldiers in the stands headed for the exits, and we got escorted off of stage into a bunker until the mortar fire was over.

While I was in the bunker, I realized my dear friend Al Franken was still handcuffed and dressed like Saddam Hussein from a skit he was doing for the soldiers; it was quite a strange sight. However, I was too busy becoming religious to realize the irony of the situation.

This past week felt like I was watching the same exodus from the market to the safe bunkers as I did that night in Iraq. Investors don't know what to do and are figuratively running for safe haven.

Opportunity Knocks

Buy low, sell high. Sounds easy, but so often we do just the opposite. When momentum is taking us too far in one direction, it is time to be a contrarian. I have a few stocks today that have been taken down with this market and have become buying opportunities.

One example is American Science and Engineering (ASEI Quote), which I wrote about positively on Monday. It suffered renewed weakness during the market upheaval last week, which I believe is an even more compelling reason to buy.

While I can't control our Fed Chairman talking about policy to a reporter at a party -- and those words roiling the market -- I can control the stocks I buy.

Imagine a scenario in which the cost to produce something remains relatively constant yet the price you can sell it at keeps increasing. This is where MEMC Electronic Materials (WFR Quote) finds itself.

To view John Layfield's video take of this column, click here.

Polysilicon prices have gone from $9 per kilogram to around $60 now, but the cost to produce this substance has remained relatively intact. Polysilicon manufacturing facilities take two to three years to come on line, with the next plant not expected to come on line by 2008 at the earliest. Demand, however, keeps increasing. Talk about a sweet spot.

MEMC is one of the few companies that makes polysilicon for the solar and semiconductor industries. The solar industry needs polysilicon for its photovoltaic (PV) cells, and the semiconductor industry needs it for its chips.

In 2005, when the chip industry went through a glut in supply of polysilicon, the solar industry took the excess capacity. Now the chip industry needs more, and it's just not there.

The solar industry is set to grow from $11.2 billion in 2005 to $50 billion in 2015. However, I believe the real growth of the solar industry will come when more polysilicon becomes available. Suntech Power Holdings (STP Quote) and Evergreen Solar (ESLR Quote) are both trying to find ways around the shortage by either buying polysilicon manufacturing or developing a way to use less of the material in their PV cells.

The play here is MEMC, which has a 47% return on equity and very little debt. With a forward multiple of just over 15 times and growth next year pegged at 20%, MEMC is in the sweet spot. Consensus estimates have been raised almost 10% in the last 90 days for next year, the same for this quarter and this year's estimates as well.

MEMC is also starting to produce its own solar wafer for sale, increasing margins even further. MEMC is a great growth story that will also have multiple expansion due to its unique position in the industry.

Since hitting a high of $48.90 on May 8, the stock price has pulled back over 30% to the low $30s. I believe you will be extremely happy in the long term buying this stock.

Another stock in the sweet spot is Qualcomm (QCOM Quote), which bought a nationwide slice of the UHF spectrum a few years ago for $87 million and then went to work developing the ability to compress channels into the spectrum. The result will be one of the first entities to broadcast television on your cell phone, MediaFLO, which is already set to be carried by Verizon (VZ Quote).

MediaFLO will carry 20 channels of video programming and 10 music channels. I own and recommend Qualcomm for proprietary technologies that are just better than everyone else's; this continues to show another way Qualcomm is leading the pack.

Finally, whoever wins the cell-phone content distribution war will have to go through the cell tower companies, so all this new content means more revenue for the towers that enable it. My favorite is American Tower (AMT Quote), which is up 30% since I first wrote about it in October. American Tower is set to win through more and more use of their existing 30,000 sites across the country.

Remember, being poor is bad, staying that way is stupid.