Back To School: Investing For The Second Half Of 2013

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 |  Includes: ACAR, NOK, NSSC
by: S. Michael Mandala

The first half of 2013 brought slight gains for the domestic equity markets as geopolitical unrest, Federal Reserve comments, and economic indicators did their best to drag our investments down. The gains for the year are yet to come.

For investors, the first half of 2013 was a dichotomy of extreme highs and worrisome lows due to various intrusions of once placated market risks. The Boston Marathon bombing, unrest in the Middle East, Ben Bernanke's comments, sluggish economic growth, all contributed to a volatile first half for funds and traders alike.

The three major indices on Wall Street, edged gains for the first half of the year. The Dow Jones Industrial Average rebounded to break the record high it set in May 28 and is up over 15% so far in 2013. Stocks on the Dow have gotten slightly more expensive over the course of the first half of this year with the forward price/earnings multiple climbing from 12.26 to where it stands today at 13.94, meaning investors are paying more in higher expectations for increased corporate earnings.

The S&P 500 also showed some great gains for the first half of this trading year. Resting solidly over 1600, the S&P 500 has gained 14.6% so far this year, and like the Dow, has launched over its previous record high, which was attained by the S&P 500 on May 21. In the beginning of 2013, the S&P 500 companies were trading, on average, at a forward price/earnings multiple of 13.92 and a premium has been attached since then, with the index's stocks now trading at 15.42 times future earnings.

NASDAQ companies have not been left out to dry. This index has been on the upward streak with little hiccups since the beginning of this year. In January, the NASDAQ Composite Index started at 3112.26 and is 486.24 points higher (representing a 15.62% gain) as of July 16th's closing prices. This tech-heavy index has seen prices for its stocks remain comparatively cheap when compared to the premiums attached to Dow and S&P companies. The prices of NASDAQ stocks have only attached a 10% premium over the course of the first half of 2013 and are only trading at 2.02 times Total Revenues.

Stocks to Watch For the Second Half of 2013

NAPCO Security Technologies (NASDAQ:NSSC)

This Amityville, New York-based Company is not the horror story that is attached to its residential address may presume. Actually, this company is a model of continuous growth, management dedication, and profitability rarely seen in today's markets.

NAPCO manufactures electronic security equipment, including intrusion and fire alarms, building access control systems, and electronic locking devices.

Selling primarily to a domestic marketplace, NAPCO has booked over $70 million in revenue in fiscal 2012, and is well on the way to beating that number this fiscal year, which ended June 30 and the earnings conference call to be delivered shortly. Revenues for the nine months ended March 31, 2013 were $49.6 million with cash and cash equivalents standing at $1.9 million, part of total assets amounting to $59.9 million.

The stock has performed incredibly over the past three years, with shares moving from $2.00 to $5.00, an accurate representation of a growing business projecting business returns to increased investor equity. Shareholders own over $37.2 million of this company, as of March 31, 2013, and are buttressed with over $2.00 per share in cash, making for one of the more sound investment ideas going forward this year.

Outlook

NAPCO's product line, which consists of over 5,000 SKU's, remains in high demand-and growing demand-due to geopolitical and social issues, trends in school shootings and heightened need for school security measures, and a rise in criminal activity around the country. "Rising revenues and a strong fourth quarter leads us to believe entrance into this stock at these levels are highly justified. We see opportunity through growth of the top-line of this business and the unfortunate headlines from around the world that solidify the need for the products and services of NAPCO," says Michael Tu, a buy-side analyst for BlueHill Strategic.

Traditionally, growth of NAPCO's enterprise has been solely attributed to increased demand for their base products-locking mechanisms, fire and intrusion alarms, and building access and control systems-but the model is expanding to include a recurring revenue stream. On my call to NAPCO's Chief Executive, Richard Soloway, he stated, "[Our] new products, launched over the past year have been changing our business from just selling [manufactured] product to adding a recurring revenue component to the products themselves. By doing this we enjoy the sale over and over again."

Revenues will be generated by adding a cloud-based solution for consumers to use to wirelessly connect to their security systems for a myriad of applications. Because of the increasing switch of applications to a cloud-based, incremental payment theme, NAPCO's move is innovative and iconoclastic for an industry whose traditional means of growth has been through horizontal acquisitions. Because of NAPCO's initiative in growing the recurring revenue model, investors should enjoy an increased velocity of year-over-year growth.

With $0.09 in earnings per share, NAPCO's stock has a lot of room to grow as the recurring revenues from its new initiatives haven't been reflected in the corporate earnings. Mr. Tu continues to explain; ""NAPCO has the current capacity to produce $200 million in product in their Dominican Republic manufacturing facility by just adding one shift and not investing any more capital to expand the facility. That means by just looking at their growth in product business, we expect them to earn $0.18 in just product sales alone, and with their recurring revenue streams hitting on all cylinders, I expect them to bring in $0.75 to $1.00 per share by 2016."

NAPCO is a company worth taking a serious position in as all signs show this world is in an ever-growing need for their products and services. With a management team in place-the Chief Executive, Richard Soloway has been with the company since 1969-that remains loyal to the business and the dealers and customers they supply, we can expect nothing but the best from this company going into the second half of this year and beyond.

ActiveCare (OTCQB:ACAR)

The growing trend of health care costs and overall health deterioration in the United States has been the focus of governments and corporations alike, on both the buy and sell side of health care. ActiveCare manufacturers and markets medical solutions, including medical testing equipment, remote patient monitoring services, and mobile health monitoring services. Its technology currently uses remote patient monitoring technology for the real-time monitoring of chronic diseases and physical conditions for members. They have a "concierge service" that not only monitors the member/patient, but also interacts with them incase of a medical emergency or if the member/patient vital signs are beyond preset boundaries.

The last reported fiscal quarter, ending March 31, 2013 showed ActiveCare's management and sales teams effectiveness by delivering to the company $4.8 million in revenues with over $900,000 in gross profit. "[This is] a good indicator of the broadening acceptance of our Monitoring and Wellness Programs," reports Michael Acton, Chief Financial Officer of ActiveCare.

ActiveCare's current member base is around 24,000, and according to their Press Release describing their second quarter results-released on May 16, 2013-management expects the number of paying members covered to reach 40,000 members by the end of this year. Doubling the member base should give ActiveCare an annualized top-line number of over $8 million.

The stock has been flat for most of the first half of this year, trading 50% below its 52-week high. Trading volume has not been responsive to the company's news, which isn't a metric against future expected performance of company fundamentals, but a lack of research coverage by Wall Street analysts. I expect that to change once ActiveCare repeats its pace of growth and Wall Street will not have a choice but to take serious note of this company.

Outlook

ActiveCare has surreptitiously become the world's largest provider of cellular glucometers. This shakes up an industry led by conglomerates, which include GE and Honeywell. How ActiveCare edges them is in the monetizing of patient data. The management of ActiveCare has been able to take the data from patients and offer transparency into their member population, which translates into cost controls for insurance companies and self-insured organizations. This move to data commoditizing will lead ActiveCare to be a formidable player in the patient monitoring sub-industry of Healthcare Equipment.

The growth of ActiveCare's enterprise is aided by current political and corporate pressures to cut healthcare costs and find solutions to a growing diabetic populations, whose issues and complications from the disease could cost insurers over $500,000 should the patient need multiple invasive procedures. By offering transparency, ActiveCare gives insurers an angle to keep costs low and reduce political risk-such as future implications of Obamacare-which could translate into an explosive customer base for the company.

Following a record-breaking quarter for the company, the stock has a lot of room to move. Once Wall Street can appreciate the impact ActiveCare will have on the overall financial health of insurers around the country, expect the shares to reflect that fact in a short amount of time.

Nokia (NYSE:NOK)

If you hadn't already have seen Nokia's surge against Apple and Samsung, you probably have been living under a rock. The chief of Nokia, Mr. Stephen Elop, has launched a new phone advertised to directly assault the iconic iPhone and neuve riche Galaxy.

Nokia also has climbed aboard the redesign of the camera smartphone to meet consumer's demand for them vis-à-vis digital cameras. According to DS Rawat, a honcho with India's technology sector's government oversight, there's a 92% probability a consumer will search for a better camera in a smartphone rather than a forking over money for a digital camera.

The convergence of technology will fare well for this once-hot, not-hot, now-warm cellular device maker. With BlackBerry still reeling, Apple phones slowing, and Samsung reaching a plateau, my bet is that Nokia reemerges as a leader in the cellular industry, and in a big way. Its namesake already has taken a cavalier stance against its rivals by using the Windows-based phones as a launching pad through Nokia's hardware contributions. As a matter of fact, Nokia has tripled year-over-year growth and accounted for approximately 79% of all Windows smartphone sales.

Thankfully, Nokia presents an ample buying opportunity in spite of the major traction the business has. The stock is trading 25% off of its 52-week high and is building a solid trading base at $3.00. Investors in general have not given Nokia its just due, and point to the negatives on the company's financial statements. This current quarter will surprise many, in my opinion. As big funds and tech-heavy hedge funds continue to take more "risk on" trades, Nokia should be on the A-list of stocks to buy in those funds.

Outlook

The dynamic cellphone and smartphone market presents opportunities for turnaround stories like Nokia. They have been able to integrate a broader technological platform to outfit its products with attractive utilities, which should translate into higher sales.

Nokia's strategic relationship development has also made for a brighter outlook for this company and its stock. As noted above, 79% of all Windows smartphone sales incorporate are based on or through the Nokia brand. Coupled with their camera division being implemented as a stand-alone sector of their business, the smartphone interdependency with their other businesses makes for a combination punch when approaching this stock entering the second half of this year.

At these levels, the stock is a favorable purchase. Financially speaking, the company has a lot of room to grow and has shown through proper financial scaling and management, they will be able to grow their margins and cash flow. Qualitatively speaking, Nokia is a household brand, especially in Europe, that isn't going anywhere.

Conclusion

The markets meteoritic and seemingly uninhibited rise the first half of this year forces us to redefine our portfolios and study where we would feel comfortable placing our future capital gains expectations. By utilizing value propositions combined with exponential growth potential, as found in NAPCO, ActiveCare, and Nokia, we can offer our portfolios the opportunity to capitalize on the momentum of the market while protecting our assets with wise business decisions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.