- Robots are destined to be omnipresent, according to Google’s Schmidt.
- Select robot stock valuations are attractive relative to growth potential.
- A basket strategy may work best given ongoing volatility of individual issues.
Robots are OK, but who wants to live next door to one? They are all turning out to be such smarty pants.
A computer recently passed something called the Turing Test for artificial intelligence. It was able to convince researchers at the University of Reading into believing it was human by posing unseen as a 13-year-old boy named Eugene.
While they might not make such personable (pun intended) neighbors, robots are certainly here to stay, and they are growing rapidly in both numbers and in smarts.
If that sounds like an epic growth investment opportunity, it's probably because it is.
Earlier this year, some of the more high-profile robotics stocks got ahead of themselves from a valuation standpoint, but they got a healthy comeuppance in the general tech & high beta stock selloff that followed.
Now it's time to take a fresh look at the category, which can include factory 'bots, military apps, drones, vacuum cleaners, auto-surgeons, navigation devices, automation plays and - perhaps sooner than we think - driverless cars.
In consideration of robotics stocks, never mind Google or other big diversified tech stocks that happen to own small robot operations among their other multi-billion dollar holdings - they are nowhere close to pure-plays for getting real exposure to the robot story.
We also are throwing out, for the time being, the Robo-Stox Global Robotics and Automation Index ETF (NASDAQ:ROBO), a passively managed fund that tracks global companies with a significant portion of their revenues derived from robotics or automation-related products or services.
ROBO is the best-known global ETF for investors to get such targeted exposure to robotics, but it also has significant foreign exposure among its more than 80 components stocks, including companies from Japan, Germany and China - with all of the tax, currency and political risks that entails. ROBO is also flat for the year in performance.
In our view, a basket of domestic robotics and automation-related stocks can make the most sense for investors. That strategy can alleviate some of the volatility inherent in individual issues while capturing the remarkable growth potential of the theme.
Some previous high-flyers in the space, like 3D Systems (NYSE:DDD) and Faro Technologies (NASDAQ:FARO) have taken a tumble in recent months and have not yet recovered. Other potential candidates, like Rockwell Automation (NYSE:ROK) and AeroVironment (NASDAQ:AVAV) came so far so fast that their current valuations have outpaced analyst estimates of their reasonable prospects.
In the end, we came up with an updated list of 8 domestic robotics and automation-related stocks with promising potential, but that do not exceed GARP (growth at a reasonable price) prudence.
Under the basket strategy, an investor with $12,000 to spare could buy $1,500 each in shares of Cognex (NASDAQ:CGNX), Nordson (NASDAQ:NDSN), Immersion Corp. (NASDAQ:IMMR), Forum Energy Technologies (NYSE:FET), Atmel Corp. (NASDAQ:ATML), FLIR Systems (NASDAQ:FLIR), Varian Medical Systems (NYSE:VAR) and Microchip Technology (NASDAQ:MCHP).
All of these pass the analyst smell test - they each have a First Call consensus "buy" rating.
They each have institutional ownership of 65% or more, an average market cap of $4.9 billion (the outlier among them is IMMR, with a market cap of only $312.9 million), and are solidly profitable with average EPS (NYSE:TTM) of $1.74.
A couple of their historic metrics are a little light - thus an average operating margin of 14.68% and an average ROE of 16.90% - but their solid future prospects appear to outweigh the rear-view mirror.
These stocks' respective 2014 EPS growth projections and 2015 P/E ratio estimate, according to analyst data gathered by Fidelity Investments, are:
CGNX +38.55% and 28.8; IMMR +214% and 20.1; FET 20.87% and 15.0; ATML 63.70% and 14.6; FLIR 15.25% and 20.9; VAR 7.94% and 16.8; and MCHP 12.94% and 16.1.
The growth prospects for robotics and similar automation-related issues appear bright. Valuations in the category have dropped in recent months, making the stocks more attractively priced now. Given the ongoing volatility in individual robot equities, a basket strategy may be prudent to capture the category's potential without undue risk. There are ample candidates available to pursue the basket strategy now that are not overpriced, and that industry analysts have attached reasonable growth projections to. Some of them are listed above.