The Next Triple-Digit Winner in Tech?

For the past two years, I’ve been telling my subscribers how every single device they use would soon be “connected.” I’m not just talking about mobile phones or tablets. Everything — cars, appliances, TVs and thermostats — will soon be connected to the Internet.Cisco (CSCO) calls the connectivity of all these devices the “Internet of Things”(IoT).The networking giant predicts over 50 billion devices will be connected to the Internet by 2020.That’s up from just over 9 billion devices today.But even if the market only ends up being half of what Cisco predicts … the opportunity will still be enormous. And this could lead to big profits for investors for many years to come. And I happen to have a favorite play on this trend … My favorite play on this trend is Skyworks Solutions (SWKS). They make the chips that go into most of the “connected” devices Cisco is talking about. This includes the new mobile phones made by Apple (AAPL) and Samsung (SSNLF). But unlike these gadget-makers, Skyworks is almost a pure play on the IoT megatrend. I first recommended Skyworks to my subscribers in December 2012. Shares were trading below $30 at the time. Today, Skyworks trades for over $100 a share. That’s a gain of more than 250%.If you missed the boat on Skyworks, that’s OK. That’s because …

Another company is positioning itself to be a huge beneficiary of the IoT megatrend.I expect to see huge gains from this stock over the next 18 months. Let me explain … A few months ago, I attended Cisco’s presentation at the Consumer Electronics Show. The event, held every January in Las Vegas, is like the Super Bowl for technology companies. Cisco explained how the IoT is essential to every business owner in the world. Companies can increase productivity by analyzing data in real time through connected devices. The networking giant believes the IoT could be a $19 trillion market.To put this in perspective, that’s bigger than the market cap of every company in the S&P 500 combined! With a market-cap of $150 billion, Cisco is one of the largest companies in the world. They generate almost $50 billion in sales. In short, even if Cisco is able to generate billons from the IoT trend, it may not move the needle much. The much-better plays on the IoT are the “nuts and bolts” companies like Skyworks Solutions. Skyworks’ market-cap was one-fifteenth the size of Cisco when I first recommended the stock in 2012. The company was generated a few billion in sales. In other words, as more and more devices became connected, it’s much easier for a smaller name like Skyworks to double its sales than Cisco. Another company that stands to be a huge beneficiary of this trend is Broadcom (BRCM).Broadcom is similar to Skyworks. They make chips that go into almost every popular device you can think of. This includes mobile phones (from Apple and Samsung), GPS devices, smart watches, appliances, gaming consoles and drones. While these two companies are similar in many ways, Broadcom’s stock has significantly underperformed Skyworks’ over the past two years.

Most of this underperformance can be attributed to management. Broadcom was losing a ton of cash (about $2 million every day) on its cellular baseband segment. The major players in this space include technology behemoths Qualcomm (QCOM)and Intel (INTC). Broadcom suffered intense pricing pressures, and it was always a generation behind Qualcomm and Intel in terms of technology. As a result, this segment was a huge drag on the company for almost five years. Margins and earnings suffered, and its stock significantly underperformed its peers. Finally, in July 2014, management threw in the towel. Broadcom announced it would exit the baseband business and focus more on “connectivity.” This includes making chips that support Wi-Fi, Bluetooth, wireless charging and the wireless device market. In short, Broadcom is following in Skyworks’ footsteps. It is becoming a near pure play on the IoT — an explosive trend that should last for decades. Since Broadcom exited its baseband business, the company has finally started growing again. In fact, operating profit grew more than 20% year-over-year.And this is just the beginning …Broadcom has a huge pipeline of products coming to market. I’m sure they will make their way into every new product offered by existing customers including Apple, Samsung, Ericsson and Xiaomi — as well as its customers in the appliance, automotive, cloud, 4K television and smart home space. Turning to the fundamentals, Broadcom is now generating over $1 billion in cash flow. Management plans to use this cash (as well as its $3 billion in cash on its balance sheet) to buy back $1 billion of its stock in 2015. These purchases should put a floor under the stock, from which it could potentially run higher. Broadcom also trades at just 14 times earnings. That’s a huge discount for a company that grew its earnings by more than 25% last quarter. Plus, at 14 times earnings Broadcom is trading at a 30% discount to its peers.It’s not often you get a chance to buy a growth stock trading at a huge discount to its respective industry.I expect this gap will close in the short term, as Broadcom is expected to report strong earnings growth for the foreseeable future. If you followed my call to buy Skyworks, I suggest taking some money off the table and rolling those gains into Broadcom. My research suggests the stock could double over the next 18 months as it becomes on pure play on the IoT, one of the biggest growth trends in technology. Good investing, Frank Curzio

image credit: forbes.com