Have Investors Acquired A Taste For Samsung, The Forbidden Fruit?

| About: Samsung Electronics (SSNLF)

Samsung (OTC:SSNLF) (Ticker: 005930:Korea SE) has been one of the more excitingly volatile names year-to-date, rising and falling in dramatic fashion where shares in many other corporate entities have shown anemic, sideways growth and contractions amidst uncertain market conditions. The enthralling boom-and-bust patterning in Samsung's stock price exemplifies the kind of whipsaw movement that drives American traders' infatuation with certain of the overseas exchanges. This fascination is also the product of a (forbidden fruit complex); the average American investor lacks either the means, the wherewithal, or the pull to build up a portfolio of stocks traded overseas. Investing money in an exchange operating in a time zone that is essentially the inverse of one's own also carries with it numerous practical issues and regulatory incongruence that can make the process of altering one's holdings in a timely manner much more difficult. Due to these restrictive conditions, the preferred method used to invest in products traded exclusively overseas are exchange traded funds (ETFs) and similar vehicles derived from the value of these stocks.

Korean stocks are not as well indexed in American domestically traded products as are those of certain other Asian nations, but of the available vehicles several possess significant exposure to Samsung. The most robust exposure to Samsung attainable by American retail investors (short of going through the requisite pain required to trade on the Korea Exchange) is through the iShares MSCI South Korea Capped Index ETF (NYSEARCA:EWY). Though not a pure Samsung or even pure information technology trade, Samsung is the single largest component of this diversified ETF, making up 21.13% at this time. For the sake of perspective, Hyundai Motors, the second largest component of the fund, makes up just 5.99%. Obviously, the diversification of this fund will smooth volatility to some degree and some moves will be counter to those in Samsung's stock depending on market conditions, however the correlation between the fund's chart and Samsung's are rather strong, as illustrated below.

Chart courtesy of Yahoo Finance

Another notable element on this chart is the recent and dramatic collapse of both EWY and Samsung after a relatively long period of positive growth. The swoon began when it became clear to analysts that shipments of Samsung's Galaxy S4 would fall well short of the expected 80 million. The revelation of these sentiments led to a 6.2% single day drop, the largest in over 9 months. Though some support appeared in the following days it was promptly broken, and Samsung stock and EWY both reached a year-to-date low in late June. The slide was exacerbated by uncertain macroeconomic conditions and widespread belief that smartphone stocks had reached, or were nearing, a peak. These sentiments remain, but the introduction of a newly optimistic GDP growth forecast from Seoul arrested the collapse (at least temporarily) of both Samsung and the Korean market in general.

Though the upward revision did improve the near-term outlook for these stocks, both the macroeconomic conditions in South Korea and the concerns regarding the smartphone market's growth potential remain on the horizon. China has engineered a massive liquidity crunch that threatens to destabilize all of the economies in the region if the People's Bank of China's calibrations were incorrect. South Korea's economy is export-driven, and the near-certain decline in China, the continuing bafflement of the Bank of Japan by their own policies, and the impending decline in quantitative easing in the United States are each in and of themselves factors that could cause a notable reversal in South Korean GDP growth. EWY is not only vulnerable to macroeconomic weakness; if only one or two of the larger component stocks of the fund were to lose significant ground, the whole fund will lose along the same line.

Samsung has a number of approaching catalyst events that could make or break this rally. The company's ongoing smartphone war with Apple (NASDAQ:AAPL) has left the Cupertino, California-based firm looking elsewhere for chip manufacturing. As of now Samsung provides the majority of the chips powering the Apple iPhones and iPads, and other miscellaneous elements such as tablet (but no longer phone) screens, despite the fact that the two companies seem to be embroiled in constant legal battles over myriad (alleged) infractions on each others' intellectual property rights. Apple recently finalized a deal with Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) that will make the latter firm the source of the chips that will be utilized in future lines of Apple products. This deal may not be exclusive, however, and even if it were TSMC will not start production of these chips until 2014, allowing Samsung sufficient time to fill the void that would be left by their rival.

Samsung is expected to release second quarter operating profits and sales numbers on the 5th of this month, and seeks to improve upon the elevated operating profit seen in the last round of announcements. A continuing improvement will likely be enough to bolster positive sentiment in the tech firm in an atmosphere of extreme uncertainty. Forward-looking estimates of Samsung's profit in the second quarter of this year have been cut in the wake of apparent weakness in sales of their S4, and export numbers out of Seoul have driven tensions between Samsung and shareholders higher. However, the company has developed what may be an ace-in-the-hole in their battle against Apple in the form of the newly created S4-mini, a device that could make headway in emerging markets. Developing a presence in these markets has been difficult for high-end tech producers due to prices and, namely in Apple's case, restrictive contractual agreements with local providers. The sales figures for this device and Samsung's market penetration in the markets targeted by the release of this device will be one of the key figures to watch in future earnings releases. Despite the fact that these lower-cost devices tend to carry lower margins than devices in the same vein as the iPhone and S4, the ability of a tech firm to access formerly untapped markets will be the driver of future profits regardless of current market share.

Chart courtesy of Yahoo Finance

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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