We recently compiled a list of the 8 Best Electronic Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where TE Connectivity (NYSE:TEL) stands against the other electronic stocks.
The Electronics Industry’s Growth Trajectory
The electronics sector is experiencing robust growth driven by several key factors. Technological advancements, particularly in consumer electronics, are a major catalyst, with innovations in smartphones, the emergence of 3G and 4G technologies, smart wearables, and smart home devices significantly boosting demand. According to Grand View Research, the global consumer electronics market is projected to experience significant growth, expanding from $1,068.22 billion in 2022 to $1,619.04 billion by 2030, with a compound annual growth rate of 6.6%.
Additionally, rising income levels, especially in emerging markets, are fueling demand, as more households can afford electronic devices. The expansion of the IoT ecosystem presents new opportunities within the sector, enhancing automation and efficiency across various applications. Advancements in semiconductor technology are crucial for this growth, powering everything from smartphones to electric vehicles. Furthermore, sustainability initiatives are becoming increasingly important, with companies exploring eco-friendly manufacturing practices and materials to meet consumer demand for greener products.
The semiconductor industry is at a pivotal moment, driven by rapid advancements in AI and the evolving dynamics of the market. With significant players recently reporting disappointing earnings and a slower-than-expected recovery in chip demand, the sentiment surrounding semiconductor stocks is one of cautious optimism. As the market grapples with these challenges, investors are keenly focused on identifying the best electronic stocks poised to thrive amid this transformative landscape.
On October 16, Dan Niles, Niles Investment Management founder & portfolio manager, joined ‘Fast Money’ on CNBC to discuss how semiconductors are a canary in the coal mine for the tech sector. In a recent discussion about the semiconductor sector and mega-cap technology, Dan Niles provided insights into ASML’s recent performance and its implications for the broader chip industry. He highlighted that the Dutch company experienced a significant miss in orders, reporting over a 50% decline compared to expectations. This drop indicates that while demand for certain products remains strong, the overall outlook for the semiconductor market is weaker than anticipated. Niles explained that if companies are ordering its equipment today, it typically means they are preparing to produce chips about a year from now. This lag suggests a slowdown in demand that could impact future revenues.
The relationship between electronic stocks and the semiconductor industry is vital and mutually reinforcing, as semiconductors serve as the backbone of modern electronic devices. The performance of semiconductor stocks directly impacts the broader electronics sector. Supply chain fluctuations can significantly affect both industries; shortages may lead to production delays and reduced revenues for electronic manufacturers, while stabilization can foster growth for both sectors.
Our Methodology
We sifted through ETFs, online rankings, and internet lists to compile a list of 15 electronic stocks with high market caps. We then selected the 8 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician soldering components for frequency control products in a modern electronics lab.
TE Connectivity (NYSE:TEL)
Market Cap as of October 22: $44.64 billion
Number of Hedge Fund Holders: 46
TE Connectivity (NYSE:TEL) designs and manufactures a broad portfolio of electronic components and electrical parts, including various types of connectors, heat shrink tubing, automotive relays, and a wide range of sensors. These products are used in industries such as transportation, industrial applications, communications, medical devices, and energy, as they are essential for connecting and protecting electrical signals, power, and data, enabling critical applications to operate safely and reliably.
In the third quarter of FY2024, the company’s revenues declined 0.48% as compared to the prior year’s third quarter, generating an amount of $3.98 billion. Overall, orders increased 4% year-over-year and 3% sequentially. The Communications segment led this growth, surging over 50% sequentially driven by AI applications. Transportation orders declined slightly due to commercial transportation weakness.
In the Transportation segment, auto sales grew 4%, outpacing the global auto production decline of 1%. Content growth had strong double-digit sales in China offsetting declines in Europe and North America. Commercial Transportation declined 8%, primarily due to European weakness, and is expected to remain down in the fourth quarter. Sensors sales declined due to market weakness and portfolio optimization.
In the Industrial Solutions segment, sales were down 2%, with strength in aerospace, defense, marine, medical, and energy offsetting weakness in industrial equipment. The Communications segment saw a 32% growth in data and devices. Appliances grew 12%, driven by both the Americas and China.
Despite challenging market conditions, the company has demonstrated strong resilience and operational excellence. Its strategic focus on secular growth trends, coupled with its ability to drive margin expansion and generate strong cash flow, positions it well for continued success.
The London Company Large Cap Strategy stated the following regarding TE Connectivity Ltd. (NYSE:TEL) in its Q2 2024 investor letter:
“Initiated: TE Connectivity Ltd. (NYSE:TEL) – TEL designs and manufactures connectors and sensors, supplying solutions to the transportation, industrial, and communications industries. The critical components that TEL sells have long life cycles and they make up a small percent of the overall cost of materials for a complex electronic systems (i.e. low cost but high-cost failure products), creating high switching costs and barriers to entry. TEL has leading share in the global connector market (including 30-35% share in automotive) with leverage to secular growth from the ‘electrification’ of multiple end markets. TEL’s management team has enacted successful cost- realignment strategies, driving significant margin improvement and leading to mid-teens returns on invested capital. TEL fits our process well. It has a low level of net debt, generates healthy cash flows, returns a significant amount of capital back to shareholders through its dividend and buyback program, and it currently trades at a discount to our estimate of intrinsic value and a discount to its peers. Given its strong competitive position, capital allocation philosophy, and favorable industry tailwinds, we believe TEL presents an opportunity to own a high quality compounder.”
Overall TEL ranks 3rd on our list of the 8 best electronic stocks to buy according to hedge funds. While we acknowledge the growth potential of TEL, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TEL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
