Small Cap Could be Traders’ Ticket to 46% Returns in Our Surveillance Society
We live in a surveillance society. My first direct exposure to this fact occurred last week. I received a traffic ticket in the mail for making a right turn at a red light when the roads were completely deserted. Not to mention I came to full stop prior to making the very safe turn. The ticket was for a whopping $330, and along with it came high definition photos of my car and licence plate. I was furious!
What happened next made me even more upset.
I called my local attorney’s office that specializes in fighting traffic tickets to see what could be done in this case. Heck, right turns on red lights should be legal unless clearly marked otherwise. What the lawyer told me was very disconcerting. He said, “You can’t fight the cameras.”
Talk about an Orwellian-type surveillance society. Big brother says you committed a crime and you can’t even fight him? My outrage at this situation led me to look into cameras as a potential investment opportunity. You know the old adage, if you can’t beat them, might as well join (or at least profit) from the unfortunate situation.
After scrolling through multiple companies involved in the space, I found one that has the set up for a perfect investing opportunity right now — small-cap OmniVision Technologies (NASDAQ: OVTI). The technical and fundamental pictures of this company point toward powerful upside potential.
Santa Clara, Calif.-based OmniVision was founded in 1995 and is part of the semiconductor industry. With a market cap of just over $880 million, its particular niche is developing, designing and marketing semiconductor image-sensor devices for a variety of manufacturers. Its devices are used in the webcam, surveillance, digital camera, mobile phone, automotive and medical sectors. Although its core markets are mobile phones and entertainment, it is expanding quickly into the other listed spaces.
OmniVision produced record revenues in fiscal year 2013, ended April 30, of $1.4 billion due in part to the success of the BSI-2 based sensors. These sensors offer “better image quality, enhanced color reproduction and improved overall camera performance in ultra-small form factors.”
In total, the company shipped over 855 million sensors during the fiscal year. However, to meet demand, investment in new equipment was needed, which resulted in declines in gross margins and net income, which came in at just under $43 million, down from $65.8 million in fiscal 2012.
First-quarter fiscal 2014 results are scheduled to be released on Aug. 29. Based on the underlying economic factors and the company’s strong ramp up, I am betting on outperformance during this quarter.
OVTI is a supplier for Apple (NASDAQ: AAPL); therefore, investors often view it as a proxy for Apple stock. The relationship with Apple is only a negative when AAPL shares are moving lower. But Apple has been racing higher since late June, and is currently flirting with the $500 level. This can only help OVTI.
While mobile phones and tablets are a substantial part of OmniVision’s business, its other segments are rapidly growing. These additional segments should have an increasingly positive impact on the company’s bottom line due to industry and societal trends.
The most exciting of the emerging markets for the company is the automotive sector. New automobile technology will require up to five cameras per vehicle. OmniVision has played a key role in this evolution by securing design wins at European and domestic auto manufacturers.
In addition, as I experienced with the camera ticket, security and surveillance use of the company’s products is rapidly increasing. Not to mention, the company has made aggressive acquisitions that should provide a competitive advantage.
The purchase of Aurora Systems in 2010 should help the company capitalize on trends in the emerging video-projection consumer market. And the acquisition of $65 million worth of image-sensor patents and patent applications from Eastman Kodak (OTC: EKDKQ) protect intellectual property and create barriers to entry for competitors.
Taking a look at the technical picture, OVTI just broke higher from a clear double-bottom on the daily chart. I like the stock on a breakout above $17.13.
Recommended Trade Setup
— Buy OVTI on a break above $17.13
— Set stop-loss at $14.50
— Set initial price target at $25 for a potential 46% gain in nine months